Let’s start off the new year with a money saving tip, especially for low-down payment, first-time owners who bought a home more than two years ago.
If you bought your home using conventional financing, putting less than 20% down, you undoubtedly had to buy private mortgage insurance or PMI.
PMI insures your lender for a portion of the mortgage balance, should you default on the loan. If today you have 25% equity (if the loan is 5 years old or less) or 20% equity (if the loan is more than 5 years old), you may be able to get your lender to cancel the PMI.
The Homeowners Protection Act of 1998 provides for borrower-requested cancellation of PMI and lender-required cancellation.
First, Fannie Mae and Freddie Mac typically require 25% equity, or 20% equity as stated above.
For example, let’s say you paid $750,000 for your home 36 months ago. You put 10% down, which means a loan balance of $675,000. You’ve made on-time payments for three years and now have a loan balance of $650,816. Your home is now worth $870,000, according to your mortgage loan originator. That means, you now have 25.2% equity.
Here’s what you do next:
—Contact your loan servicer and ask for the PMI to be removed. Their records indicate you’ve made all your payments on time.
—That loan servicer asks you to pay for an appraisal, which costs roughly $650. The appraised value comes in as hoped for.
—The lender cancels your $186 monthly PMI insurance.
Note: The above example assumes a 700 FICO score. Your PMI will vary, depending on your credit score and the percentage of the down payment and a few other factors. The better the score, the better the rate. And the bigger the down payment, the better the PMI rate.
If you have lender-paid mortgage insurance (in which a mortgage loan originator talked you into baking the PMI into the rate, otherwise known as a no-PMI mortgage), you are out of luck. The increased interest rate you accepted with the baked-in PMI stays with you for the life of the loan. It can only go away if you pay off or refinance the mortgage or sell the home.
Today’s current rate environment of 6.5% to 7% makes it unlikely you’ll refinance, since you are likely sitting on a significantly lower interest rate.
PMI is not tax-deductible. But when it’s baked into the mortgage using a higher interest rate, you end up having more real dollars of mortgage interest tax deductions.
For example, if you used lender-paid insurance (PMI is not itemized separately), the interest rate is 7.125%, assuming a 740 FICO score and 5% down on a $750,000 sales price, leaving a starting loan balance of $712,500. Your principal and interest payment would be $4,800.
If you had gone with a borrower paid PMI (PMI is itemized on your billing statement) for roughly the same cost, you’d end up with a $166 monthly mortgage insurance payment at a 6.5% interest rate with an all-in payment of $4,670. Once the PMI is removed, you’d be saving $296 per month, compared with the baked-in PMI.
The Intercontinental Exchange estimates 2,485,525 purchase mortgages had less than 20% down in 2022, and 1,883,096 in 2023. These figures also include FHA and VA mortgages with less than 20% down. Forty-four percent of mortgages with less than 20% down were FHA and VA in 2022, and 45% in 2023, according to Andy Walden, vice president of Research and Analysis at Intercontinental Exchange.
Of those, California had 181,550 loans with less than 20% down in 2022 and 123,214 in 2023.
There were 32,886 purchase mortgages with less than 20% down purchase in Los Angeles and Orange counties in 2022 and 23,991 in 2023; the Inland Empire had 38,220 and 26,403, respectively, and San Diego County had 16,327 and 10,373, respectively.
HPA requires a loan servicer to automatically cancel private mortgage insurance when a home loan balance is first scheduled to reach 22% equity, based on the home’s original value, and based solely on the initial amortization schedule, regardless of the outstanding loan balance. That’s roughly nine years down the mortgage line, according to an amortization schedule I ran. Obviously, you shouldn’t wait for the automatic cancellation if you have the required equity.
If your loan servicer refuses to remove the PMI when you think it should be removed, go back to your original mortgage loan originator to help you through the process.
Since 2019, first trust deed mortgage interest deductions were capped at $750,000. Consult your tax adviser for your situation.
Freddie Mac rate news
The 30-year fixed rate averaged 6.91%, 6 basis points higher than last week. The 15-year fixed rate averaged 6.13%, 13 basis points higher than last week.
The Mortgage Bankers Association reported a 21.9% mortgage application decrease compared with two weeks ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $806,500 loan, last year’s payment was $156 less than this week’s payment of $5,317.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.75%, a 15-year conventional at 5.625%, a 30-year conventional at 6.375%, a 15-year conventional high balance at 5.99% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year-high balance conventional at 6.75% and a jumbo 30-year fixed at 6.625%.
Eye-catcher loan program of the week: A 30-year mortgage, with 30% down locked for the first 5 years at 5.99% with 1 point cost.
.Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com.