South Bend Home Loan: 2015

Tuesday, September 22, 2015

How Paying More Interest Could Save A Home Buyer Money

Andrew and Amanda thought they knew what I was going to say when they walked in the door. They were looking to buy their first home, had good jobs, great credit and the ability to put 20% down. They had already talked to a couple of other lenders before me so they were fully prepared for my recommendation.

“So we should put 20% down, right? And probably do a 15 year loan to pay it off faster?” they asked nonchalantly.

“No….no, that’s not what I would recommend for you. I’d only put 10% down in your case and consider the 30 year term.”

Needless to say, Andrew and Amanda were surprised. Anyone who has worked with me before would likely be shocked as well. Why? Because it’s well known that I’m very anti-debt. Even though I help people get loans for a living, my goal is for my buyers to owe as little as possible for as short of a period as possible.

So why would I encourage these buyers to borrow more and stretch it out over a longer time?

Considering The Whole Picture

Truly, there was a method to my madness. When making my recommendation, I was just looking at a bigger financial picture than the previous lenders had considered.

Most mortgage lenders tend to look at the new mortgage as an isolated loan when making their recommendations. It’s not though. This new loan is going to be a part of the buyer’s total financial picture. As such, the full financial picture should be looked at when deciding on which mortgage options are the most beneficial.

Yes, Andrew and Amanda had the savings to put the 20% down. They also had extensive student loans, though, most of which were at 6%-7% interest rates. Andrew and Amanda had larger incomes which was great in that it allowed them to save money quickly but bad in that it excluded them from getting any income tax benefits on the interest paid on those student loans.

The interest rate on their new mortgage would be 2-3% lower than the student loan interest and it likely would be deductible when determining their taxable income. Seeing it would be a cheaper source of money on multiple fronts, financially it made sense to pay more on the student loans and less on the mortgage.

But….what about PMI?

When I explained my recommendation, Andrew and Amanda immediately grasped the logic of using their extra savings to pay down the student loans instead. The risk of Private Mortgage Insurance (PMI) concerned them though.

“Don’t we have to put 20% down?” they asked. “Won’t we have to pay PMI if we don’t?”

“Not in your case. For you, I would recommend a no PMI conventional loan.”

Ways To Slay The PMI Beast

No PMI? Is there really a no PMI conventional loan with less than 20% down? Well, technically...no. If you don’t have a 20% down payment, someone is going to have to pay for insurance to protect the lender if the buyer defaults. Normally that insurance is paid for in monthly installments by adding a premium to the buyer’s mortgage payment.

That is not the ONLY way it can be paid though. If the buyer chooses, they can pay a lump sum upfront and have no PMI for the life of the loan. If that lump sum needed is under 3% of the price, they can also ask for the seller to pay for it in seller concessions.

These weren’t the options I proposed for Andrew and Amanda though. Instead, I recommended lender paid PMI.

Getting Smart with LPMI

Lender Paid Mortgage Insurance (LPMI) can sometimes be the best option for PMI avoidance. In Andrew and Amanda’s case, I could increase their mortgage interest rate by 0.125% and, with the excess lender income from that, pay the lump sum PMI in full for them. This was a win on both fronts in that it removed a higher monthly PMI cost (not tax deductible) and replaced it with a lower increase in interest cost (wonderfully tax deductible).

And how did this work out for them in dollars and cents? Very nicely, actually. The monthly PMI option would have added $108.23 to their monthly mortgage payment. The 0.125% higher interest rate? It only added $25.59 to the payment.

Knowing the Downside

While this was a good option for Andrew and Amanda, this structure isn’t one I would propose for everyone because there is a downside. The buyers going this route have to actually follow the plan we’ve made. That means the extra that was going to go toward the down payment needs to actually go to the student loans, NOT to new furniture for the home or other optional items. And the extra money they’ll have each month by taking a 30 year term instead of a 15 year term also needs to go to the those student loans. If it doesn’t, they’ve taken on additional debt for nothing.

I could see that Andrew and Amanda were capable of working this plan though. As a matter of fact, they were thrilled by it.

Paying off their student loans had been a BHAG (big hairy audacious goal) for them since graduation, and they were excited to start working on it in an intentional, mapped-out way.

So The Moral Of The Story Is…

Is there a moral to this story? But of course! In short, mortgages are not a ‘one size fits all’ thing. There are multiple ways to structure a loan and a mortgage lender should be exploring all of them in light of their buyer’s big-picture finances, not just through the lens of the mortgage alone.

If you’re considering a home purchase and want a detailed review to see what mortgage options will best benefit you, drop me an email at lori.hiscock@ruoff.com. I wish you all the best in your home shopping adventure!

To learn more about the products covered here or any other aspects of home financing, contact Lori Hiscock at lori.hiscock@ruoff.com.

Lori Hiscock is a Sr. Loan Officer at Ruoff Home Mortgage‘s South Bend office. One of Michiana’s top mortgage loan officers, Lori started her lending career in 1995 after obtaining her bachelor’s degree in Finance from Western Michigan University. You can connect with Lori Hiscock or apply online here. NMLS#404320.

Ruoff Mortgage Company, Inc. is an Indiana corporation licensed by the Indiana Department of Financial Institutions (DFI) and operates with the following licenses:

Indiana-DFI First Lien Mortgage Lending License #10994;
IL Residential Mortgage Licensee #MB.6760734;
Michigan 1st Mortgage Broker/Lender License #FL0017496.

Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182

Monday, June 22, 2015

More Home Buyers Now Qualify For Indiana Down Payment Assistance

Great news! Indiana Housing and Community Development Authority (IHCDA) announced an increase in the income cap for home buyers wanting to participate in the mortgage credit certificate program, the My Home reduced down payment program and the Next Home down payment assistance program.

What this means is that more Indiana home buyers can now take advantage of these programs. Let me take a minute to summarize what these programs offer:

Mortgage Credit Certificate (MCC)

The MCC is a federal income tax credit that is available for first time buyers. The eligible buyer who enrolls in the MCC program will receive an income tax credit when filing their tax returns that is equal to a percentage of the interest paid on their mortgage that year. Annual credits given range between 20-35% of the interest paid and they are ongoing for as long as the buyer lives in the home, pays income taxes and pays mortgage interest. Amounts received vary based on loan size but typically run between $800-$1,000 in year one, declining slowly thereafter.

My Home

My Home is a conventional loan product for first time buyers that offers a 3% down payment, a competitive interest rate and a lower cost for private mortgage insurance (PMI). The interest rate is not driven by the credit score which is different than the norm for conventional mortgages, so a person qualifying with a 680 credit score will get the same attractive interest rate as the person qualifying with a 780 score. That and the lower PMI cost are what make this loan option appealing to certain buyers.

Next Home

Next Home is the most well known IHCDA product because it addresses the down payment need of many buyers. Next Home has both a FHA and conventional option and, in both cases, the entire down payment is covered by IHCDA. This program is NOT for first time buyers only. As long as the buyer sells their existing home before closing on the new home, they could qualify.

The interest rate and fees are higher for this program. Seller concessions are typically used to cover the higher fees but conventional loans are limited to a 3% cap from the seller so the conventional buyer typically needs to invest some money themselves (the FHA buyer typically does not). It is still less than with a typical loan product, though, and the conventional loan gets that same reduced PMI as the My Home product, so it can help many buyers get into a home sooner with little to nothing out of pocket and a comfortable payment.

Higher Income Limit Amounts

With today's announcement, IHCDA is allowing more buyers to now qualify for these programs by raising the maximum household income limits. In St. Joseph County, Indiana, a buyer using the MCC program or the Next Home FHA program can now qualify with an income of up to $61,700 for a 1-2 person household. For a 3+ person household, the income limit is increased to $70,955.

For conventional loans not used jointly with the MCC, the limits are now even higher. Next Home Conventional and My Home are allowing household income limits up to $86,380.

Share the Word

Many home buyers in Indiana are not aware of these programs and they should be. Not all buyers will choose to participate because of the higher interest rate and higher fees, but all buyers should be aware of the option so that they can compare the costs/benefits and decide for themselves.

At a minimum, all first time buyers should consider the MCC. The $500 enrollment fee is regained in under a year typically which makes it a great option for the buyer who has the upfront money available.

But, again, many home buyers have never even heard that these programs are out there. Please - help them learn by sharing this post. They'll thank you for it. :)

To learn more about the IHCDA products covered here or any other aspects of home financing, contact Lori Hiscock at lori.hiscock@ruoff.com.

Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182

Monday, March 16, 2015

The Downside of Down Payment Assistance

Potential home buyers often ask me if there is any down payment assistance available through the government. It's a good question to ask. Why not take advantage of free money if it's there, right?

The good news is - there IS down payment money available. The Indiana Housing and Community Development Authority offers the Next Home down payment assistance program to people buying a primary home in Indiana. This program is great for many reasons, including:

Full down payment given - It covers all of the money needed for the buyer's down payment.
Conventional or FHA - it can be used with both conventional and FHA financing.
Not for first time buyers only - The program is not just for first time buyers. Even if the buyer owns a home at the time of application, as long as it will be sold prior to purchasing the new one, they could qualify.
Flexible credit score requirement - to get the down payment help, the buyer's credit score does need to be higher than the minimum FHA requirement, but it's reasonable. Currently, we require a 660 for Next Home down payment assistance.
No delay in buying - using the program doesn't slow down the home buying process. We still close in the typical 30-45 days.
No higher property qualifications - there is no higher property standard set for the house being purchased and no additional inspections needed.
Higher income limits - There is a maximum household income limit for this program so, if you make too much money, you don't qualify. The limit is generous though. For a 1-2 person household, the current limit is St. Joseph county is $67,000. If there are 3 or more people in the household, it's $77,050 (link to all limits for the state here - County Income Limits).

So, this all sounds good, right? Why wouldn't someone who qualifies take advantage of this?

This IS good, really, but there are downsides to using this program. The main three are:

Upfront Money Still Needed

Even if you are using the Next Home down payment assistance, you still need money upfront when buying a home. You need your earnest money when your offer is accepted (typically $500-$1,000). Within a week after the offer is accepted, you'll need to enroll in the Next Home program (currently $100) and - if you're a first time home buyer - you'll need to take an online home buyer education class (currently $75). The home inspector will also typically want to be paid upfront, if you have one, but you can normally negotiate for this to be paid at closing, potentially from the seller's assistance.

Higher Interest Rate

The interest rate for the Next Home mortgage is typically higher than the interest rate you would get if you paid the down payment yourself. The difference varies with rate fluctuations in the market, but on average the Next Home rate is 0.25%-0.50% higher than the normal market interest rate.

But the Big One Is....

These are all minor inconvenience with using this program. No one wants to gather more paperwork, pay a couple hundred to IHCDA or have a higher interest rate, but to get the free money, it's probably worth it.

There is one piece to this program that may make it NOT worth it, though, if you have another option and that is the higher closing costs.

Let's back up a bit - when you are buying a house, you need money for the down payment, money for closing costs (title work fees, lender fees, appraisal costs, etc.) and money for prepaid items (first year of home insurance, prepaid interest, escrow build-up). The Next Home program pays for your down payment but it does NOT pay for the closing costs or prepaid items.

So who does? If you have the money and are willing, you do. If you don't have the money, you ask the seller to pay them on your behalf. This is allowed as long as the total amount you are asking for doesn't exceed 6% of the price for FHA loans or 3% of the price for conventional loans.

Here's the problem - the closing costs are higher for Next Home loans. How much higher depends on the price of the home but, in general, if you are asking the seller to pay for those for you, you are going to have to ask the seller to pay for 5-6% of the price worth of fees on your behalf.

This can create problems in multiple ways:

Seller offended - It's fairly common for a buyer to ask for 3-4% from the seller from costs, but when you ask for 6%, the seller may get offended. They may not be open to your offer because they think you are asking for too much.
Higher price needed - If the seller's are OK with paying the 6%, they're probably going to expect you to pay a higher price on the home to help offset the higher amount they're giving.
Challenge in re-negotiating - If you are paying a higher price for the home because of higher seller concessions, their is an increased risk that the appraisal will come in low. This is important to know going in because, by the time the appraisal is back, you've spent money on appraisals/inspections/enrollment fees that you can't get back. If the appraisal comes back low, the seller may be unwilling to drop the price without also reducing how much of your costs they are covering. This is also a risk with repair negotiations. If he is giving 6% towards your costs, the seller may be unwilling to give more to fix things that come up on your inspection.

Bottom Line

It's currently a seller's market in northern Indiana. There are multiple offers happening on good homes so buyers need to go in with the strongest offer they can. If you are a buyer and you need the down payment help given by Next Home, by all means use it. It is a good program and will get you into a home now versus having you wait until you save up the down payment.

If you have the ability to cover the down payment yourself, though, consider doing so. You'll have lower upfront costs, a lower interest rate, will likely pay less for the home and could have a better chance of your offer being accepted because you are asking for lower contributions from the seller.

Bottom line, 'free money' isn't always free, and you don't want to miss out on the home you love because you're trying to get some. Weigh the pros and cons, talk to you mortgage lender and Realtor and then decide if using Next Home for your purchase is the right step for you.

To learn more about Next Home down payment assistance or any other aspects of home financing, contact Lori Hiscock at lori.hiscock@ruoff.com.

Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182

Tuesday, January 27, 2015

Should I Refinance?

"Hey Lori, I saw online that interest rates are currently lower than my interest rate. Maybe I should refinance."

I get this call from past clients all the time, and my answer typically surprises them. "It might make financial sense for you to refinance, but - truthfully - it might not."

"What?? But the rate is lower! Why wouldn't it make financial sense?"

It's a good question, and one I'm happy to answer for them - and for you!

The Benefits of Refinancing

There definitely can be benefits to refinancing. The main four are:

Lower Interest Rate - This needs little explanation. If you could pay a lower interest rate on your loan than you are paying now, that's a good thing.
Lower Monthly Payment - Typically refinancing also gives you a lower monthly payment which is nice.
Shorter Term - Sometimes people refinance to get a shorter term as well, changing from a 30 year loan to a 15 year one, for example. In cases like that, the monthly payment might actually go up even though the rate goes down just because they're paying it off faster. They are typically saving a TON of money on interest with that shorter term, though, so it's still a good thing.
Removing/Reducing Private Mortgage Insurance (PMI) - this is one that people often don't even think of. If their home value has gone up since they bought it and they are currently paying PMI as a part of their payment, refinancing could remove or reduce the cost of that PMI.

So....WHY did I say it might not make financial sense to refinance? There truly are situations where refinancing to a lower rate will cost you more money. Let's look at those now.

Paying More with a Lower Interest Rate

The thing that people often don't realize about refinancing is that a lower interest rate doesn't automatically equate to less interest paid. Why is that? Because refinancing typically resets the loan term.

Let me give an example. Let's say your mortgage balance is $70,450 and your interest rate currently is 4.75%. You've been paying on the loan for 5 years now and you have an opportunity to refinance to 4.00%. The closing costs will be $2,000 and will be rolled into the new loan.

If you continue to pay your loan as-is without refinancing, you will pay $50,056 in interest between now and the time it's paid off in 25 years. If you refinance into a new 4.0% loan though, adding in your closing costs, you will actually pay $52,069 in interest by the time the loan is paid off.

Why are you paying MORE interest with a lower interest rate? Because by refinancing, you are stretching your loan back out to 30 years. Adding in those 5 additional years will cost you more in interest, even with the lower rate.

Now, could you take the new, lower rate and pay it back over 25 years? Absolutely! And your payment would still drop $19.25/month if you did this. The truth of it is though, few people actually do that. They probably intend to but, when the bill comes showing that new, lower payment, they just pay that minimum amount due. By doing that they end up paying more for their mortgage than if they had left their loan unchanged.

Adding Permenant Mortgage Insurance

Paying more in interest isn't the only reason to potentially pass on refinancing, though. If you currently have a FHA mortgage and are considering refinancing into another FHA mortgage, you may be strapping yourself to unexpected mortgage insurance for the life of your loan.

HUH??

Let me explain. If a homeowner currently has a FHA mortgage and that mortgage was taken out before June 3, 2013, the mortgage insurance portion of their monthly mortgage payment will eventually go away. When they have enough equity, their lender will remove that cost from their monthly payment, never to return.

On June 3, 2013 though, FHA changed that. The majority of FHA loans taken out after that date will have mortgage insurance for the life of the loan, meaning ALL 30 YEARS.

How does this impact your refinancing decision? If you are going from a FHA mortgage to a FHA mortgage, if you intend to stay in your home for awhile and if you currently have a FHA mortgage that will drop that mortgage insurance charge in time, refinancing into a new loan that will have mortgage insurance charged all 30 years doesn't make sense, even if the interest rate is lower.

The Bottom Line

So what does this mean to you? Should you refinance if the rates are lower or shouldn't you?

It truly depends on your unique situation. Some people should and some people really shouldn't.

Here's what you should do. If you are curious about refinancing, contact a lender and ask them if it makes sense for you. If they automatically say "Yes!", hang up and call someone else. They're not thinking about what's best for you. They're thinking about getting another loan.

If they say "It depends", though, talk to them some more. Or, even better - just call me! I'm happy to do the math with you to see if refinancing makes sense or not. If it does, I'll gladly help you save some money. And if it doesn't, I'll tell you that too.

Ohio Mortgage Broker Act License #MBMB.850220.000

The Florida Office of Financial Regulation License #MLD1182

Friday, January 9, 2015

Big Reduction in FHA Mortgage Insurance Rate

For the past seven years, I have stood back and watched FHA's mortgage insurance rates go up and up and up. FHA has always charge a monthly mortgage insurance premium (their version of Private Mortgage Insurance aka PMI), and rightly they should. That premium helps cover their cost of losses in foreclosures, so charging it is only right.

The amount they charge has gotten a bit painful for my buyers through the years though, and that has bothered me. It was only 0.5% per year before 2008, but then it went to 0.55% before leaping to 0.9% in 2010.

That wasn't the end of it though. 2011 saw another huge increase to 1.15%, followed by a hop to 1.25% in 2012 before landing at it's current straining rate of 1.35% per year in 2013.

This high rate worked for FHA when they were the only game in town and - after the credit crisis - they were for many buyers. Fannie Mae just recently re-activated their 3% down conventional option, though (YEA FANNIE MAE!), and Freddie Mac's 3% down option will be back on the market later this year. With these lower down payment options and more flexibility being offered by the PMI companies, FHA is starting to feel the heat.

Thankfully, they've done something about it. Today they announced a HUGE reduction in the monthly mortgage insurance rates, dropping it from the current 1.35% to a much more bearable 0.85% per year. For the person borrowing $125,000, this will equate to roughly a $50/month savings on their mortgage payment.

This reduction will take effect for all FHA case numbers assigned on or after January 26th. To make themselves even more beloved by the general mortgage populace, FHA will allow existing case numbers to be cancelled and reissued with this lower rate if the case number was issued within 30 days of today's announcement (January 9th).

Some of you might recall a blog I wrote a few years ago where I broke up with FHA (FHA, I'm Dumping You). Well, maybe it's time to reconsider. FHA has come a'courtin' again, and I like the smell of their flowers. Keep it up FHA. Their might be hope for you yet.

(To learn more straight from HUD, click here for Mortgagee Letter 2015-01).

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Tuesday, September 22, 2015