Mortgage leads loans Rates

Chances are unless you’re right in the throes of purchasing your home, you’ve never even heard of private mortgage insurance. But, if you intend to purchase a home and you don’t want put the 20% down that traditional lending institutions require, you’re going to become very familiar with private mortgage insurance. What is private mortgage insurance and who pays for private mortgage insurance? This article will take the opportunity to discuss private mortgage insurance and why you’re required to purchase it; we’ll also examine the latest federal regulations governing private mortgage insurance.

Let’s first define what private mortgage insurance actually is, and why you might be required to purchase the insurance. Private mortgage insurance is an insurance purchased to protect the lender, not the borrower. The borrower however pays for the mortgage insurance, and is provided to the lender instead of the 20% down payment normally required when purchasing real estate. The insurance provides the difference between the fair market value of the home and the actual price a lender may be able to sell the property for, in case of a default on the loan. Normally, the lender will require a 20% down payment and forgo the private mortgage insurance option. However, under certain circumstances if the buyer has an excellent credit card debt rating, is well known to the lender, and is deemed to be low risk, private mortgage insurance may be an option offered by the lender.

The current mortgage market seems to be flooded with such varied products as the interest only loan and the 125 loans that private mortgage insurance seems to be a thing of the past. You rarely encounter a situation when the buyer is required to purchase the private mortgage insurance; those situations most likely to continue to require the purchase of the private mortgage insurance are those where the lender is a traditional lending institution. Mortgage companies have long since ceased requiring borrowers to purchase private mortgage insurance.

Mortgage investors, such as the Fannie Mae and Freddie Mac programs, have recently come to the aid of the borrower by introducing an option to the primary mortgage market that allows borrowers to pay as little as 5% down and purchase only enough mortgage insurance to cover 25% of the loan; this creates a potential citing situation for the borrower. The borrower may pay a slightly higher interest rate in order to lower the cost of insurance that the advantage lays here: mortgage interest is fully tax deductible, private mortgage insurance is not.

There’s another option, also regulated by the federal government and passed into law in 1999, known as the homeowners protection act of 1998 established rules for regulation of private mortgage insurance requirements once a homeowner reaches a level of 20% equity. What the law requires, in layman’s terms, is that a lending institution must notify you once your equity levels reach 20% of the appraised value of the home. Once you the kind of 20% equity level, you must be given the option to drop private mortgage insurance. If this proposal had passed into law some 20 years ago, it would have been met with great resistance among the lending community; today, the interest only loan and loans that offer mortgages in excess of the appraised value of the home overshadow the effect of the 1998 homeowner’s act.

Many homeowners seem to mistake the private mortgage insurance purchased in order to secure the loan, with that of the homeowner’s liability insurance. Lenders are responsible for making clear the distinction between private mortgage insurance purchased to protect the lender versus the homeowner’s liability insurance purchased to protect the homeowner. Both forms of insurance will need to be purchased, and the borrower will be responsible for payment of both insurance premiums.

Quite often as we go through the mortgage process, we encounter many unexpected expenses; private mortgage insurance is normally one of those unexpected expenses. As a consumer if you’re contemplating the purchase of a home, contact your local lending institution, or a mortgage company in your area, and asked for information concerning the purchase of a home for first-time homeowners. The information you’re provided should contain all the terms, conditions and terminology explanations that you will need in order to make an educated decision when choosing lenders and homes.

Many of today’s consumers are financing their homes with interest only loans. Not very many of those consumers are aware that some of the grandparents, or great-grandparents also financed their homes with an interest only loan. I myself wasn’t aware that this type of loan existed prior to the mortgage market of today. But, we weren’t the first to use the interest only concept. During the Roaring 20s, many of middle-America’s citizens chose to finance their homes with interest only loans.

Why did they not remain popular, and does this tell us anything about the market of today? Well, let’s take a moment to examine the interest only loan of the 20s compared to the loan of today, and maybe we can become better educated shoppers.

The interest only loan of the 20s was a pure product. This means that the mortgages were interest only for the life of the loan. At the end of the mortgage period, nothing had been paid against the principal. Only the interest payments against the principal borrowed had been paid. This worked really well until the crash of the stock market and the Depression. At this point, many of the families that had lived in homes paying only the interest due were forced from their homes when there was no money and no jobs. Many lending institutions were left with foreclosed mortgages, and no cash. The traditional lending institutions at this point, simply shelved the interest only loan, in favor of more equitable lending; in other words, they preferred to loan money for a mortgage that would build equity. This gave the homeowner something comparable to savings, and the banker a lower outstanding mortgage balance.

That is a lesson we should carry forth when lending today, and using the interest only option. Most of the products offered today do carry a limit for the term of the interest only element. Generally, if the loan is a 30 year loan, no more than half can be used towards the interest only option. At least someone has exercised some level of judgment in providing for a cap, or limit to the interest only term.

In today’s society, everything we see encourages instant gratification, and home mortgages are no different. Instead of sending a message that says, if you want more house, you need more money, we send the message that it’s ok to borrow beyond your means. Now, in all fairness, there are some mortgage shoppers that fit the description of the candidate for the interest only loan. Investors, and candidates who do not intend to keep a home for longer than 5 years, do benefit from the interest only loan option. But for the typical homeowner, the interest only mortgage only prolongs the equity building process, and may often put the borrower in a situation where he or she cannot actually afford the payment when the principal and interest period begin.

Thanks to the booming real estate market, the interest only loan option, and the expansion of the mortgage product market, the increase in purchasing power has enabled many prospective homeowners to actually make a dream a reality. But at some point, the market will cease to boom, and the mortgage market will cease to expand. Will the consumer that purchased the interest only loan be able to afford the consequences, should the home suddenly not be worth the original loan amount? Let’s hope for the sake of the unwary homeowner, this is a situation we do not soon encounter. And, for the most part, I don’t believe we’ll see this any time soon. Thanks to the natural disasters along the gulf coast, and the continued demand for real estate and building materials, the housing prices we’re currently experiencing, along with the growth we’ve seen for the past couple of years, should continue at the same rate.

There are other, more stable loan products available, but these products don’t provide the kind of return for the mortgage lender that the interest only loans do. They also don’t pose the risk the interest only loans pose. The interest rates, however, are very competitive on these loans, and I don’t’ look for the general public to decide in favor of safety over savings. After all, nothing ventured, nothing gained.

The real estate market and the mortgage market are great friends; they generally are seen hand in hand, wherever they may go! One fuels the other’s ambitions. Never a truer statement has been made and they (the real estate and the mortgage market) seem to feed off each other, as they both have continued to grow over these last few years.

If a potential buyer has the greater possibility of securing a mortgage, the greater the opportunity to sell a home or buy a home becomes; Whenever the opportunities increase for the buying and selling of real estate, then the prices for real estate increase. Can you clearly see the relationship now and how one drives the other? As the mortgage market has expanded, and the possibilities broadened, so have the prices of homes, the new home construction market, as well as the commercial development of real estate.

The potential for problems exist when this all happens too quickly, or when the growth in one area exceeds the average growth rate of other areas. This is the case with the real estate market and the interest only mortgage. Much of the growth in the mortgage market has been with interest only loans. Many analysts put the interest only segment of the mortgage market at almost 23%. That’s a huge hunk of the entire mortgage market and this segment has been responsible for most of the overall growth. It would also seem that it has played a tremendous role in fueling real estate prices. Is this a rollercoaster ride, waiting for the drop, if so, let’s hope we’re all buckled in! Let’s take a moment to look at the four areas that contribute to this continued upward growth, and their impact on real estate.

The price of existing homes on the market is a pretty easy one to figure out; if you have your home for sale, quite naturally it will bring a comparable price to the other homes in your area. How does this serve to drive real estate prices? This concept works with a Domino effect, in that when one home increases in value, it also affects the homes around it driving the price, further upward.

The new home construction market is heavily reliant on building material prices to determine the building cost and the contractor’s profitability. If building construction is on the increase quite naturally, the prices of building materials are on the increase; when you have an optimistic and growing economy, you will have increases in building material cost.

The other big drive in the real estate market comes from the development of commercial property. In resort areas, particularly the development of real estate property for commercial purposes tends to quickly affect the surrounding areas real estate prices. Many of today’s commercial mortgages have reached loan limits well over $1 million; in fact, some of the residential mortgage loans in certain resort areas are approaching the have the million-dollar mark.

Now, when you combine all of these contribute factors, a mortgage market that is extremely optimistic with its lending capital, you have the makings of a market segment, with the potential for a bubble effect. What happens in a bubble effect economy? The bubble continues to grow until it bursts. This is what many analysts and economists fear: that too many consumers are betting the farm on a continual, optimistic spurt of growth. What could cause our booming economy to rupture? In reality, many conditions can contribute and provide the needed catalyst.

Well, what if there is a continual increase in pricing but there is generally a continual downward spiraling of the ride we’re on? Well, if there should be a tremendous downward turn in the investment market, if there is a continuing loss of jobs in this country, or if there are any natural occurrences that lead to disasters that are beyond governmental or company control, you could see a possibility for disaster. Does that mean it will happen? No. It just means that the potential exists. But in the defense of the housing and real estate market, if you’re going to be risky, that’s the place to be. It’s one of the safest risky businesses that exist.