Homebuyer mortgage loans - Buyers beware
One can hardly read a newspaper or listen to news on the radio without hearing about the sub-prime mortgage fallout. Many buyers were lead down the yellow brick road and signed loan papers not really realizing the consequenses of what they were signing.
Because of the sub-prime fallout new rules are now in place regarding credit and job tenure. Buyers must now have a stronger credit rating and have good job tenure. In other words the sub-prime fallout has caused lenders to tighten the rules and many buyers are facing that hard reality.
Just as adjustable rate mortgages were wrong for many people there is a new practice many mortgage lenders are using that buyers should be aware of. Anytime one takes out a mortgage loan you must face mortgage insurance or private mortgage insurance which is a monthly fee that is added to your loan in the even there is a default. This insurance basically protects the lender in the even you default on a loan your lender executes. The fees can be in the range of $50-$100 or more added to your monthly payment.
This mortgage insurance is placed on loans when the borrower pays less than a 20% down payment. What some lenders are now doing is offering to pay your mortgage insurance fee for the life of your loan but at a cost to you. Mortgage lenders will basically charge you a higher interest rate in lieu of paying your mortgage insurance fee for the life of your loan.
What you need to recongnize is that mortgage insurance can be removed from your loan in the future. If real estate values appreciate and your pay your loan down you build "equity" in your home. Once you have increased your equity substancially you can request to have the mortgage insurance removed from our payment. You will be required to pay for a new appraisal to verify your have 20% equity but it can be worth it to remove the monthly mortgage insurance fee from you monthly payment.
You need to look at some important information. If for instance if you are quoted a 6% mortgage rate and you pay your own mortgage insurance vs. your lender paying your mortgage insurance but raises your mortgage rate to say 6 1/2% you need to realize you will pay the extra 1/2% for the life of your loan.
An extra 1/2% interest rate on a $150,000 loan for 30 years equals an extra $17,559.45 you will pay on your loan for the life of your loan. Think about this. If you pay your own mortgage insurance and within 10 years you can opt out of paying the monthly fee due to your home appreciating and paying down your loan, you save a lot of money.
My point is this. Compare the rate between you paying your own mortgage insurance or your lender paying it. If the difference in rates is as high as 1/2% or more you are much better off paying your own mortgage insurance rather than paying a higher interest rate.
If you have any questions please contact me by calling me at 208-880-2333 or emailing me at george@tallabas.com and I will be happy to assist you with any questions you may have regarding your next home purchase.