Ditching PMI – Part 2

Last time we discussed ways of getting the PMI payment out of your life once it is there. Most would agree that it would be better if you didn't have it in your life at all. There are some strategies a new home buyer can look into to eliminate the burden of PMI. They don't always work out, but are worth pursuing.

80,10,10

Many years ago, we were buying a house and only had about 10% to put down. Since we had done business with this representative before we discussed our options. Here is where it is good to work with someone who actually has your interest at heart rather than someone who just wants to sell you a loan. Yes, it is true, not a lenders are pure of heart.

The normal procedure would have to put down the 10% and get a loan for the balance. What our “friend in the business” suggested was two loans: one for 80% with no PMI and a shorter term second at 10%. When we looked at the numbers, it was a no brainer. The second mortgage payment was fairly close to the amount we would have paid for PMI and the payments went toward knocking down the amount owed, rather than giving piece of mind to the banksters somewhere across the country. I've spoken with some lenders and some will do this. Shop around. If you are putting 3% down, I'm pretty sure this approach won't fly.

Seller Carries Second

Depending on the seller's financial situation, some can be induced to take back a portion of the payment. Why would they do this? Now multiple buyers for every property may not be be optimal time for this strategy but in buyers markets, it may help them sell the home more quickly. Also, if they are not needing the funds to buy their next home and have no investment plans, you can give them 25-50 times more than the amost non-existant interest paid by the banks and still get a good deal.

Private Lenders

Since you are not looking for a full term loan, there are many people who have found making private loans are a better investment than the banksters can ever offer. Talk to friends who invest in real estate, many will know of these people, but, they may be hesitant to share the information so their favorite lenders don't run out of money before their project can be funded.

One Caveat

Thanks to Messrs Dodd and Frank protecting the American public, balloon mortgages for your home are now longer legal. The logic for this is that during the Great Depression, many mortgages had lower payments for so many years and then the entire balance came due. People could not get more financing an many lost their homes. This applies to both sellers and private lenders. Regular institutions know not to create such loans.

On the other hand, if you are buying an investment property, it's like the wild west. For the most part, whatever you and the lender can agree to will make the deal work. Just be careful you don't get so excited about the deal that you sign anything just to get it done. Read the paper and if you don't understand it... paying a couple hundred to a real estate attorney can save you thousands.

 

Ditching PMI – Part 1

 

PMI, or Private Mortgage Insurance, is a fact of life for many home buyers these days. Most sort of understand it as a requirement to get the loan. What the insurance does is protect the lender (and the underwriter) after they have given you the usual financial colonoscopy in case you stop making payments. Just be aware, PMI is part of the price or admission but it does nothing to protect you or your interests.

This is usually required if you are unable to put the down the desired 20% when buing a home. Yes, you can get a home loan for 3% down, or sometimes less, but it will cost you, in terms of interest rate and PMI premiums. While I am no fan of the banksters doing this, in reality, lower down payment loans do present a higher risk. Of course they can always boot you out on the street (maybe not now though) and take the property back, but that is expensive for them, and rarely a winning proposition. We will look at PMI from the perspective of homeowners already caught in its clutches. Next time, we will look at it from the buyers angle and what they may be able to do about it.

Is PMI As Certain As Death And Taxes?

If you've been in the property for a while, there are several strategies available to remove this financial waste from your monthly budget. There are even some approaches you can look at if you are just buying currently... but more about that next time.

Refinance

If you have built up some equity over time and watched real estate values rising, taking you to the desired 20% equity position, you may be able to refinance with new terms. If your current lender won't do it, and your payments are current, there are many of other institutions anxious to sell you a loan. However, don't go looking to pull out a wad of cash as you take advantage of the increased value... otherwise you will be back in PMI territory once again.

Get A New Appraisal

By this I mean a thorough appraisal from a licensed appraiser. Not that you friendly local realtor wouldn't be happy to give you an idea of what your home is worth, but lending institutions have more confidence in a bona fide professional appraiser. You can take this to your current lender and stand their with your hat in hand while they run it through the various, hidden (to you) people who will make the decision to allow you to remove the extra charge each month. If that doesn't go well or your patience runs out, you can use it as you pursue a refinance else where. It could be well worth the several hundred dollars in the money saved.

Pay The Balance Down Faster

Given the nature of most mortgages, the early years show small reductions in the principle owed and most of the payment goes toward interest, adding what you can to each payment will help increase your equity faster and shorten the length of your loan. It will help if you can get an amortization schedule for your loan so you can see what is actually going on with your payments. Doubling the amount that goes to the principle each month will increase your equity to the point of releasing PMI more quickly and save you even more money as it reduces the number of payments to pay off your home. However much more you can pay off will be to your benefit.

Wait Patiently For The Banksters

In theory PMI should be removed when you achieve 20 to 22% equity in your property. However since this is of greater concern to you than the lender, you may have to initiate action to get the job done. Sometimes they are a little slow to respond and they may need to be reminded that the Homeowners Protection Act of 1999 makes removal mandatory and forbids the lender from keeping PMI in place for the life of the loan.

Look at what you are paying each month and think about what you could using the money for you rather than protecting the banksters. Putting PMI behind you may not be as difficult as you think.

More Equity In Your Home - Now What?

With the rising home prices, many home owners are seeing their equity increase dramatically. This is not necessarily an unmixed blessing since the value of the dollar is falling as inflation reduces everyone's purchasing power. But still, you have an asset that is certainly worth more than it was a year ago.

So now, what are you going to do about it, and will you benefit or get burned? There are several options. You may see the increased value as an opportunity to sell your property and buy a better, or larger one. I hate to carry bad news, but those better and nicer houses are hitting higher prices as well. Your higher price will probably give you a better down payment, but, unless there is a source for more money, it will also get you a larger mortgage, even though it is moderated by the fire sale interest rates.

Free Cash?

You do have the opportunity to pull cash out by way of a refinance or HELOC. On the plus side the proceeds are not taxable. If you are stuck with PMI, the increased value may let you ditch the extra expense.

However, it is not free money. It feels good to get a big check, but you are signing up for more payments that do have to be paid, The larger payments may put your home at risk if things begin to go badly. As much as some progressives would like to see it, eviction moratoriums cannot go on forever.

What Do YOU Want To Do?

On the other hand, If you still have your heart set on a bigger, better home, the increased borrowing power your home affords may just be the way to make your current home fit the bill – even in the era of increased material prices. This is called forcing the value to increase instead of merely waiting for inflation to take a hand.

If you are looking to invest, the equity in your property could provide the capital to get you going. Real estate purchased now may be at the top of the market or it may be higher than last year but cheaper than next year. In that case, if the property cash flows, paying a little more than in the past may not be such a big deal as historically when houses become more expensive and fewer people can afford them, more people turn to renting – and those prices go up as well.

Inflation? Going Up Or Down?

Speaking of inflation and increased prices, it is anyone's guess what the future holds. The people in DC believe the inflationary spike is only temporary. If this is true, the housing prices that have been rapidly rising may just as rapidly come down in a repeat of the housing bubbles of the past.

On the other hand, others believe the monetary polices that put more dollars into the market without real productivity increases will keep food, energy and housing prices on the upward path. I was polishing my crystal ball but it still seemed a bit cloudy.

The best path depends, in part, on which way the market goes and in part, what your goals are. You could end up more valuable assets or you could find you owe too much on your home to sell it, or even to stay in it. Unless you have a particular purpose for what ever you do – you may decide not to do anything at all.