By: Investor Solutions, Inc.
Do you remember that good feeling that you get right after buying a new car? You just left the dealership, you negotiated the sales price with the salesman for a couple of hours, and you finally got the absolute lowest price they could offer. Well, at least at the time you thought you got the best deal! Then, the following week they drop prices, offer zero percent financing, or you heard that your buddy down the street got a sweeter deal. Now, you feel like you just got a slap to the face and a knee to the groin!
Well, getting a new mortgage can leave you feeling the same way, if you don-t do your homework or shop around first for the best deal. For most people, it-s the biggest financial decision that you’ll make in your lifetime. It-s always a good idea to obtain a copy of your credit report prior to approaching a mortgage lender; this way you can make sure the information reported there is correct. When considering closing costs, it-s always amazed me how one lender can charge $1000 for a loan origination fee and the next lender is willing to completely eliminate that fee. You’ll also find a lot of flexibility in the costs that lenders charge for the Processing and Underwriting Fees. Shop around, hold your ground, and refuse to pay Loan Origination Fees and Points on your loan. Heck, why should you need to pay them a fee for your business?
Now here’s a little skinny on one of the biggest rip-offs out there& ‘Private Mortgage Insurance’ commonly known as ‘PMI’. PMI is a common expense for first-time homebuyers. It protects the lender, not you, in case of default. In most cases, if you make less than a 20% down payment on the value of the purchase price of your home, you can expect that your lender will charge you for PMI. This insurance protects the lender in case you default on your loan, which generally is considered a greater probability if you finance more than 80% of the home-s value. For those already paying PMI, once your equity reaches a certain percentage (usually 20%), you are entitled to cancel your PMI policy. ‘When applying for a $200,000 loan with 10% down, the PMI cost alone can be well over $115 per month’ according to Rhonda Constantine a Licensed Mortgage Broker with American Financial Mortgage Consultants in Orlando, FL, and this is a conservative figure assuming that you have good credit, otherwise it will be even higher. Many homeowners needlessly continue paying these premiums well after they no longer need to carry the policy (that-s $41,400 over thirty years). Of course your lender is not going to remind you, so you must initiate the cancellation with your lender.
What if you can’t afford to put 20% down on your mortgage? Do you have to suck it up and pay for PMI? In most instances there is still a way around paying for PMI, there-s a common practice know as ‘Piggy-Backing’. This can work like an 80-15-5 type of loan, whereas the 80 represents your loan (80% of the value), the 15 represents a home equity loan (15% of the value), and the 5 represents your 5% out-of-pocket down payment. By taking out a home equity loan and leveraging that amount against the purchase price of your home, it-s treated as equity in your home and satisfies the 20% down requirement, thus eliminating the opportunity for the mortgage lender to rape you with PMI. It-s common practice for home equity loans to carry a variable interest rate, usually around 1% above the prime rate, so you may want to try to pay this loan off a little early just in case interest rates start to creep up.
One of the most important questions that you must ask yourself is, ‘How long do you plan to stay in the house?’ Since the median length of stay in a home is only 8.2 years (1998 U.S. Census data), you may want to consider alternative financing methods to the traditional 30-year fixed mortgage. Such as a 5 or 7-year Adjustable Rate Mortgage, these mortgages will offer you a lower fixed interest rate for the first 5 to 7 years then after the fixed period the rate becomes adjustable. It-s a good idea for you to compare the 7-yr ARM to the 30-yr fixed and then make a decision if the savings is worth the gamble that you-ll be out of the home within 8.2 years. With current interest rates as low as they are right now, even those looking to refinance should check their bottom line. Compute the costs associated with refinancing your current mortgage and calculate how long it would take you to recover those costs as compared with the savings of lowering your existing payment.
If you’re like me, and you live in a high-risk state like Florida, homeowner-s insurance can kill you too. You may get frustrated because many insurance companies have dropped their homeowner-s division or they don-t insure in your state. Should this be the case, many states have developed a consumer insurance assistance program (in the Florida Market you can call 800-524-9023, for companies that insure in your area). If you-re shopping for a new home or your looking to refinance your current mortgage check out or for some of the best deals out there. So, when is the right time to refinance? Next month-s article will give you some tips on how to make refinancing as painless as possible.