Category: FROM RENTER TO BUYER

Whether it is your first time or your fifth, it is always important to know all the facts when it comes to buying a home. With the large number of mortgage programs available that allow buyers to purchase homes with down payments below 20%, you can never have too much information about Private Mortgage Insurance (PMI).

What is PMI?

Freddie Mac defines PMI as:

“An insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%.

Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your mortgage payment.”

As the borrower, you pay the monthly premiums for the insurance policy, and the lender is the beneficiary. Freddie Mac goes on to explain that:

“The cost of PMI varies based on your loan-to-value ratio – the amount you owe on your mortgage compared to its value – and credit score, but you can expect to pay between $30 and $70 per month for every $100,000 borrowed.” 

According to the National Association of Realtors, the average down payment for all buyers last year was 13%. For first-time buyers, that number dropped to 7%, while repeat buyers put down 16% (no doubt aided by the sale of their homes). This just goes to show that for a large number of buyers last year, PMI did not stop them from buying their dream homes.

Here’s an example of the cost of a mortgage on a $200,000 home with a 5% down payment & PMI, compared to a 20% down payment without PMI:The larger the down payment you can make, the lower your monthly housing cost will be, but Freddie Mac urges you to remember:

“It’s no doubt an added cost, but it’s enabling you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.”

Bottom Line

If you have questions about whether you should buy now or wait until you’ve saved a larger down payment, let’s get together to discuss our market’s conditions and help you make the best decision for you and your family.

When buying a home today, why is there so much paperwork mandated by the lenders for a mortgage loan application? It seems like they need to know everything about you. Furthermore, it requires three separate sources to validate each and every entry on the application form. Many buyers are being told by friends and family that the process was a hundred times easier when they bought their home ten to twenty years ago.

There are two very good reasons that the loan process is much more onerous on today’s buyer than perhaps any other time in history.

1. The government has set new guidelines that now demand that the bank proves beyond any doubt that you are indeed capable of paying the mortgage.

During the run-up to the housing crisis, many people ‘qualified’ for mortgages that they could never pay back. This led to millions of families losing their home. The government wants to make sure this can’t happen again.

2. The banks don’t want to be in the real estate business.

Over the last several years, banks were forced to take on the responsibility of liquidating millions of foreclosures and negotiating an additional million plus short sales. Just like the government, they don’t want more foreclosures. For that reason, they have to double (maybe even triple) check everything on the application.

However, there is some good news in this situation.

The housing crash that mandated that banks be extremely strict on paperwork requirements also allowed you to get a low mortgage interest rate.

The friends and family who bought homes ten or twenty years ago experienced a simpler mortgage application process, but also paid a higher interest rate (the average 30-year fixed rate mortgage was 8.12% in the 1990s and 6.29% in the 2000s).

If you went to the bank and offered to pay 7% instead of around 4%, they would probably bend over backward to make the process much easier.

Bottom Line

Instead of concentrating on the additional paperwork required, let’s be thankful that we are able to buy a home at historically low rates.

Some Highlights:

• June is National Homeownership Month!
• Now is a great time to reflect on the many benefits of homeownership that go way beyond the financial.
• What reasons do you have to own your own home?

In a recent Insights Blog, CoreLogic reported that rent prices have skyrocketed since 2005. Meanwhile, the typical mortgage payment has actually decreased.

“CoreLogic’s national rent index was up 36% in December 2018 compared with December 2005, while the typical mortgage payment was down 4% over that period.”

Why the difference between the costs of renting versus owning?

It makes sense that rents have risen. However, how did mortgage payments decrease? CoreLogic explained:

“It’s mainly because mortgage rates back in December 2005 were significantly higher, averaging 6.3% for a fixed-rate 30-year loan, compared with 4.6% in December 2018.

The national median sale price in December 2005 – $190,000 – was lower than the $220,305 median in December 2018, but because of higher mortgage rates in 2005 the typical monthly mortgage payment was slightly higher back then – $941 – compared with $904 in December 2018.”

Additionally, a recent report by the National Association of Realtors (NAR) showed that purchasing a home requires less of your monthly paycheck.

According to the Economists’ Outlook Blog, NAR’s February 2019 Housing Affordability Index showed that the “percentage of income needed” to pay the typical mortgage has decreased the last three months.

• November – 17.3%
• December – 16.9%
• January – 16.2%
• February – 15.9%

Bottom Line

What does this all mean to the current housing market? We think First American said it best in a post last week:

“The mortgage rate-driven affordability surge has arrived just in time… Rising affordability has already benefited home buyers and, if the lower rate environment persists, we’re in for a great spring home-buying season.”