Removing Mortgage Insurance

July 29, 2014 Posted by Andre Hemmersbach

If you secured a home loan with less than a 20 percent down payment, chances are your lender required you to purchase mortgage insurance (MI) to cover its exposure in case you default.

Once your equity position in the home reaches 20 percent however, you can in some cases, petition the lender to remove the MI. If you have an FHA-insured loan, premium payments to the government are required for a minimum of 5 years and the loan balance must be lower than 78% based on the original sales price of the property. FHA loans after June of 2013 are required to have MI for the life of the loan barring some limited exceptions.

Know your rights
By law, your lender must tell you at closing how many years and months it will take you to pay down your loan sufficiently to cancel the MI.

Most home buyers ask that MI be canceled once they pay their loan balance down to 80 percent of the home’s original appraised value. When the balance drop to 78 percent, their mortgage servicer is required to cancel mortgage insurance for them. Mortgage servicers also must give borrowers an annual statement that shows who to call for information about canceling MI.

The law does allow lenders to require MI of a high-risk borrower until the balance shrinks to 50 percent of the home’s value. You may fall into this high-risk category if you have missed mortgage payments, so make sure your payments are up to date before asking your lender to drop the MI. Lenders may require a higher equity percentage if the property has been converted to rental use.

With equity of 20 percent or greater, you have a good case to rid yourself of mortgage insurance. If you can’t persuade your lender to drop the MI, consider refinancing. If your home value has increased enough, the new lender won’t require MI. Make sure, however, that your refinance costs don’t exceed the money you save by eliminating MI.
Here are steps you can take to get out from under mortgage insurance even sooner or strengthen your negotiating position:
•Get a new appraisal: Some lenders will consider a new appraisal instead of the original sales price or appraised value when deciding if you meet the 20 percent equity threshold. The cost of an appraisal generally runs from $300 to $500.
•Prepay on your loan: Even $50 a month can mean a dramatic drop in your loan balance over time.
•Remodel: Add a room or a pool to increase your home’s market value. Then ask the lender to recalculate your loan-to-value ratio using the new value figure.

I would be happy to help review your options.

Share

Low Inventory Levels Help Sellers, Increase Prices

April 25, 2014 Posted by Andre Hemmersbach

Inventory levels of homes for sale in the Greater South Bay area are still at extremely low levels (see chart). Basic economic principals state that as supply dwindles prices will increase and will continue higher until buyers refuse to buy at the elevated levels and then supply increases and prices drop.

Property Inventory vs Sales Price

Greater South Bay Inventory vs Median Sales Price

Because foreclosures are currently at seven year lows, inventory during the spring and summer selling season is only expected to increase slightly.  As more buyers enter into an already saturated market, prices will most likely continue to increase. Some properties are selling within 3 days of being listed and typically at higher than the listed price. “Days On The Market” is a measure of how many days a property is for sale before going under contract (into escrow) and is a great indicator of how “hot” the real estate market is (See Chart). The less time it takes to sell the average property indicates a “Sellers’ Market” versus taking a long time to sell a property a “Buyers’ Market”

Tired of losing out to other offers? Call me to discuss a strategy to have your next offer look more competitive!

 

Days On The Market VS Median Sales Price

Greater South Bay Days on the Mkt vs Median Sales Price

 

Share

Down payment sources

March 20, 2014 Posted by Andre Hemmersbach

The biggest issue facing most borrowers in this market is still saving the down payment and closing costs! I thought I would list a number of resources that are helpful to would be purchasers that are a little short on cash.

  • If you work for a company that has a 401K plan, check with your administrator to find out if you can borrow against your vested balance. Many plans allow for a loan up to 50% of your vested balance or $50,000 for a purchase of a home. Best part about this loan is that most of the time the payments will not count against your qualification ratios.
  • Call your HR department or boss to see if your employer has a company program that will do an employer loan for the purchase of your home. This debt does count against you but I have helped borrowers whose employer had incredible rates of interest for such loans.

    Your Backyard

    Your Next BBQ

  • Cash in a Roth IRA for $10,000. Currently the tax rules allow you to pull up to $10,000 without penalties for the purchase of your first home. (you still need to pay regular income tax on the amount you pull and check with your CPA).
  • Sell stocks or better yet, borrow against stocks or securities you own.
  • Check with Non-profits or your church to see if they have any special down payment assistance programs.
  • Sell or refinance a boat, car or RV.
  • Get a gift from any family member or members (some programs allow for 100% gift funds).
  • Find a co-signer or partner with someone with cash and purchase the property together (you can do an equity share agreement that splits the property price appreciation at the time of sale).
  • If you are a veteran, you do not need a down payment as financing is available at 100% of the purchase price.
  • Look for a seller that will carry a second (usually will not work in a seller’s market)
  • If you have already saved around 3.5% of the sales price for a down payment there are programs available that allow the lender to pay all your closing costs.

Call me I would be happy to discuss your particular situation.

Share

Real Estate Time Bomb

January 30, 2014 Posted by Andre Hemmersbach

If you regularly read financial periodicals, you will come across articles from financial experts on doomsday scenarios. Many times they are motivational pieces focused on selling you something to “protect” you against the awaiting catastrophe; other times it is a true warning by an expert that sees something very disturbing. The Dotcom Bust, the Asian Currency Crisis and even our 2008 Real Estate Bubble all had warning signs and experts who correctly predicted the financial disaster.  Today’s popular pending Armageddons are the Student Loan Bubble, the T-Bill Bubble and in the real estate sector a warning about Equity Lines of Credit (ELOC).

If you were a homeowner in 2004 – 2008 you were receiving multiple free offers for ELOC with low payments and teaser rates. Many homeowners took advantage of those freebies and started using their home equity like credit cards to buy everything from automobiles to vacations. In hindsight these mortgage instruments have been pretty good deals. Historic low-interest rates over the last 5 years and the tax benefits associated with the ELOCs have made this a very cheap method to finance any purchase.

Unfortunately, most homeowners do not understand the mechanics of their ELOC. Many times the promissory note they signed ten years ago was never read, explained or maybe just forgotten.  A quick explanation of how an ELOC works will help you understand the time bomb lurking in the shadows.

98% of all ELOC have a 10 year draw period. During this time you can use your line like a credit card to buy goods and services. After the 10th year starts the 20 year repayment period begins (a few ELOCs have 15 year repayment periods).  All ELOC have an index and most are based on the prime rate (currently 3.25%). Lenders use an index to make sure that they receive an interest rate that is commensurate with current market conditions. To the index rate the lender adds a margin (the Bank’s profit) usually 0.0% to as high as 3.0% or more. Check your Promissory Note or with your servicer to find your margin. Every month the lender adds the index rate to the margin and divides by 12. This is the monthly rate you are charged on your outstanding balance. These loans do not contain any sort of periodic cap to protect you from quick interest rate increases month over month. A lifetime interest rate cap of 18% is standard.

So where is the potential powder keg? As the 10 year draw and interest only periods are coming to close, borrowers will get notices of their mortgage payments increasing as their ELOC change to  fully amortizing loans. The amount could be startling for some homeowners! For example, an $85,000 balance, which is pretty typical of what I see on my customer’s loan applications, at a current rate of 4.25% (3.25% Prime Rate plus a 1.0% margin) has an interest only payment of $301.04 this would go to $526.35 on a 20 year repayment. But that’s not the whole story! Understand that we are at historically low rates. In the past the Prime Rate has been above 8% seven times since 1970 and at 8.25% as recently as September of 2007. So let me run those numbers on a balance of $85,000: Current payment interest only $301.04, new payment with rates at 9.25% (Prime Rate 8.25% plus a 1.0% margin) would be $778.49 for a 20 year repayment. If your ELOC has a 15 repayment your new payment would be $874.82. That is a payment increase of $573.77 or 191%

Please do not misconstrue that I am predicting an 8.25% prime rate anytime soon, but recognize that homeowners who have ELOC s with larger balances need to be aware of potential payment increases and how it could affect them.

If I can help you figure out how your ELOC will adjust and the steps you can take to minimize the impact please call me at my office. 310 540 1330.

Share

Real Estate Values in 2014

December 20, 2013 Posted by Andre Hemmersbach

Being in the Real Estate industry gives me access to various   tools, reports and statistics that most individuals cannot find. That being said you can find a chart or statistic to make a case for or against almost anything. The big question on many of my client’s mind is where Real Estate prices go from here. Our friends at John Burns Real Estate Consulting do a marvelous job of sifting through the numbers on a state by state and county by county level to come up with relevant, timely and meaningful predictions about matters in real estate.

I found the recent information prepared by JBREC to be extremely interesting as it charts the historical ratio between the median housing payments to income.   A shorter way of describing this chart is an affordability ratio. As home payments get more expensive via higher rates, median home prices or a drop in income it is reasonable to expect a reversal in demand. The historical mean of the average housing payment to income ratio is close to 32.5%. The current ratio through October 2013 is 28.4% based on a 4.1% 30 year fixed rate.

MedianHousingPayment_to_IncomeRatios

If this chart holds true we would need another 13% increase in the national sales price or mortgage rates to go to 6% before we hit the historical mean of 32.5% in affordability.

Please call me to discuss your plans in purchasing a home or Real Estate investment in 2014. Unless you are paying cash, getting all your ducks in a row early will save you time, money and headaches!

Share