It’s a Great Time to Remove Mortgage Insurance

Question: Can you explain what Mortgage Insurance is and if there’s any way to get rid of it?

Answer:

What is Mortgage Insurance?

Mortgage insurance is an additional monthly or up-front fee added to a mortgage, usually set at .1%-1% of the loan amount, offered by either the government or private insurance companies to enable lenders to offer down payments below 20%. Mortgage insurance covers lenders for losses up to a certain amount if a borrower defaults on their mortgage.

Note: there are some sub-20% down payment products on the market for high-earning, high-credit borrowers that do not require Mortgage Insurance.

There are two types of mortgage insurance available:

  1. FHA mortgage insurance: FHA is a government program, which requires a down payment of as little as 3.5% of the sales price, and mortgage insurance is required on FHA mortgages, regardless of the amount of down payment.
  2. Conventional mortgage insurance: Conventional mortgages are home loans that are not insured or guaranteed by the government, as in the case of the FHA mortgage example. Many conventional loans are sold to Fannie Mae or Freddie Mac and thus follow these entities “conforming” guidelines.

Conventional or private mortgage insurance enables lenders to offer conventional loans with a minimum down payment as low as 3.0%-5.0%. Most 3.0% down conventional mortgages are restricted to low-to-moderate income borrowers.

How is the Fee Determined?

The cost of mortgage insurance will vary greatly, depending upon several factors:

  1. The amount of the down payment
  2. The qualifications of the borrower like credit score and debt-to-income ratio
  3. Whether the mortgage is an FHA or conventional loan
  4. The type of the mortgage such as a 30-year or 15-year loan

Mortgage Insurance Can Be Removed

If you have a Conventional Loan (not FHA), you can request that your Mortgage Insurance premium be removed from your payments once your equity reaches or exceeds 20% (loan-to-value/LTV is 80% or less). This can be a result of a natural equity increase through your monthly payments and/or through appreciating home value.

To qualify, you cannot have a late payment in the last two years and if you are making your case based on a higher market value of your home, the loan servicer will require a new appraisal (cost is usually around $500).

For Conventional Loans, your Mortgage Insurance is automatically removed once your LTV reaches 78% (equity reaches 22%) or you reach the midway point in your loan (15 years into a 30 year loan). Prior to hitting a 78% LTV, it is up to your loan servicer to decide whether to approve the removal of your Mortgage Insurance payment.

Key Takeaway

Given how much townhouse and single-family homes have appreciated recently, if you have Mortgage Insurance and have not made a late payment in the last two years, it’s a good idea to contact your loan servicer about having your home reappraised to see if you now have 22% or more equity and qualify for automatic removal or have 20%-21.99% equity and can apply for early removal.

If you’d like to discuss buying, selling, investing, or renting, don’t hesitate to reach out to me at Eli@EliResidential.com.

2021 Interest Rate Projections

Question: Do you expect mortgage rates to increase in 2021?

Answer: Happy new year everybody! Historically low mortgage rates in 2020 were one of a few factors that drove real estate prices up across the country (except in the condo market). This time last year, the Mortgage Bankers Association and Freddie Mac each predicted that rates would remain near 2019 levels through 2021, with an average 30yr Fixed Rate hovering around 3.7-3.8% through that period.

As it turns out, rates averaged about a full percent less than those projections. Rates fell consistently throughout the year, except for a brief but sharp increase in mid-March when markets went crazy with the first news of COVID-related shutdowns, until the Fed stepped in with liquidity. Below are some charts from Freddie Mac showing average mortgage rates over the last 50, 10, and 1 year.

Average Mortgage Rates Since 1971

Average Mortgage Rates Since 2010

Average Mortgage Rates in 2020

Rates in 2021+

The Mortgage Bankers Association and Freddie Mac each predict that 30yr Fixed Rates will increase slightly in 2021 and hover around 3%-3.2% in 2021. Beyond 2021, the Mortgage Bankers Association sees rates averaging 3.6% in 2022 and 4.1% in 2023.

An increase to 4% or higher mortgage rates will likely cause the rapid appreciation we’ve seen over the last couple of years to slow down, but I don’t think it will lead to a pull-back in prices unless it is combined with a migration from the DC Metro due to major changes in telework policy.

If you’re considering purchasing in 2021, I wrote a column in 2019 about my favorite mortgage programs that you might find helpful. If there’s anything I can do to help you prepare for a purchase, don’t hesitate to email me at Eli@EliResidential.com.

Question: Do I have to put 20% down to buy a home?

Answer: This is the most common question I’m asked by buyers and there are a surprising number of people who are well-qualified and want to purchase a home, but sit on the sidelines trying to save for a 20% down payment. Over the last 18 months, nearly one third of buyers in Arlington put less than 20% down and most of those people put 10% or less down.

Popular Low-Down Options

  • Conventional loans are available at 3%, 5%, 10% and 15% down
  • FHA loans are available at 3.5% down
  • If you or your spouse are active or former military, you can qualify for a zero-down loan through the VA. I detailed VA loans in this post from May 2016.
  • Typically, if you have a Jumbo Loan (loan amount exceeds $679,650) you are required to put 20% down unless you qualify for one of many preferred mortgage programs available in the market, which I mention in this post from November 2017.

What’s The Downside?

If you use a non-VA loan with less than 20% down you will have to pay Mortgage Insurance (option to pay it off up-front), which is essentially a monthly penalty/fee assessed on top of your mortgage payment that increases the less you put down and the higher your loan amount.

I explain Mortgage Insurance in this post from July 2016, and explain the process for removing these payments in this post from February 2016.

How Much Are Arlingtonians Putting Down?

Below are statistics pulled from the MLS on the amount Arlingtonians put down to purchase homes over the last 18 months.

These numbers are manually entered by the listing agent at the end of the deal and I think that in some cases agents write 0% financed (cash) instead of entering the correct info so it’s my belief that the number of loans with low down payments is actually a bit higher than the statistics reflect.

  • 32% of all purchases were made with less than 20% down, 26% with 10% or less down, and 18% with 5% or less down
  • 39% of townhomes, 37% of condos and 22% of detached/single family homes are purchased with less than 20% down
  • 14% of purchases were not financed (cash)
  • Only 3% of purchases required FHA financing and less than 2% were FHA-financed condo purchases, so consider this if your Condo Association is setting rental caps simply to qualify for FHA financing

Feel free to reach out with any questions you have about your loan options for purchasing a home anywhere in Virginia, Washington, DC or Maryland. I’m happy to answer any specific questions you have or connect you with a lender who specializes in the type of loan you’re looking for. I’m available any time via email at Eli@EliResidential.com.

Question: As interest rates have increased over the last 6-12 months, how will the market react to higher rates and do you expect them to come back down in 2018?

Answer: The rates I’m seeing today are about 1-1.5% higher than what I’ve seen on average over the last few years and about .5% higher than where they’ve been over the last 6-12 months. Generally, most economists are projecting growth in the US and there are similar signs in Europe so if that holds true, expect interest rates to continue their upward trajectory.

Higher Mortgage Rates In 2018

According to Freddie Mac, the average Mortgage rate from the 1970s-2000 was about 7%, the average rate from 2000-2008 was 6% and we’ve been hovering around 3.5-4% since 2008. Freddie Mac currently predicts that rates will reach about 5% by the end of 2018.

  • Mortgage rates are at the mercy of the US and global economies so predicting their direction is no different than predicting how the stock market will do.
  • Contrary to popular belief, mortgage rates are not directly correlated to the Fed rate that you regularly hear about in the news. So when you hear that the Fed is planning to increase rates by .25%, that does not mean your mortgage rate will be .25% higher the following day. See chart below for historical trends of Fed rate vs mortgage rates:

 

  • We are currently experiencing high daily and weekly volatility in mortgage rates, which is frustrating for many. Some weeks see swings of .25% so you can either benefit or lose out from those swings based on when you lock your rate. Discuss this risk with your loan officer.
  • You may have missed the lowest rates over the last few years, but historically mortgage rates are still well below average as you can see from the chart below from Freddie Mac:

 

The Impact Of Higher Rates

For my clients, the ones who feel the rates increases the most are those who have been in the market for 6-12 months but have not purchased yet either due to lack of suitable inventory or urgency.

It’s tough to accept that rates were about 1% lower when they started looking and now they feel like they’ve lost. Those who are just now entering the market tend to be much better at brushing it off. It also impacts my clients who are not also selling a home because those who are selling will realize the benefits of the stronger market vs those who are just buying are at its mercy.

First time buyers are also more sensitive to rate fluctuations because most are already struggling to adjust to the hefty price tag of buying what they want in the DC Metro area.

Redfin recently asked 4,000 buyers who planned to purchase in the next 12 months how increasing rates would impact their purchase and found that only 6% would cancel their plans to buy while nearly 50% wouldn’t change anything or would increase their urgency to buy.

This might seem like a good result for homeowners, but losing 6% of buyers, having 21% reduce their budget, and 27% waiting for rates to drop is a bad sign. Especially if rates continue to go up and the 27% who were waiting for rates to drop decide to either stop their search or reduce their budget.

 

I think the biggest reason increasing rates will slow the market is the psychological effect of higher rates vs the actual impact to buyers’ budgets. For buyers struggling to internalize the “loss” they’ve taken now that rates are higher, consider the following:

  • On a $400,000 loan, a .25% increase in rate represents $60/month. Try to decide if a $50-$150 change in your monthly mortgage cost is worth giving up on a home purchase or compromising on what you want/need. Most buyers decide to spend less than what they’re approved for, so there is usually some cushion.
  • The reason rates are higher is because the economy/stock market have done so well lately so your investments and/or income are hopefully increasing at a rate on pace with or above what you’re giving up in increased mortgage rates.
  • In 2017 the S&P 500 returned about 20% to investors so maybe you earned enough in the market to allow for a higher down payment?

Hopefully the net effect of everything that factors into mortgage rates is still positive for you.

With so much volatility around mortgage rates, it’s even more important that your lender be able to advise instead of just being a pass-through for today’s rates.

My clients have found Jake Ryon of First Home Mortgage (jryon@firsthome.com) and Troy Toureau of McLean Mortgage (ttoureau@mcleanmortgage.com) to be valuable resources during their home purchases and I’d encourage anybody to reach out for advice.