Pathway Mortgage | Mortgage Education and News

If you are in the market for a new home, you have probably heard that your monthly mortgage payment will include something called “mortgage insurance.” But, if you’re like most people, you’re also wondering, what is mortgage insurance and who is it insuring? Let’s break it down.

I.  What is mortgage insurance?

Mortgage insurance is what it sounds like – insurance on your mortgage. But, it doesn’t insure you. Instead, it is insurance for the lender, reducing their risk on the money they lend. Mortgage insurance is the reason that lenders are able to loan large amounts of money with small down payments. It gives your lender a guarantee that they will recover some money if you default on your mortgage payments.  

The only way to avoid mortgage insurance is to make a down payment of 20% or more of the value of the home when you purchase it. A conventional loan with 80% or less loan to value ratio does not require mortgage insurance.

The amount of your mortgage insurance depends on 1) the type of loan you have, and 2) the amount of your loan. Let’s look at the different types below.   

II.  Types of mortgage insurance

  • Private Mortgage Insurance

Private Mortgage Insurance (PMI) is mortgage insurance on a private (non-government) loan. This is what is usually going to be referred to as a conventional loan. The rates for private mortgage insurance will vary, but .62% is somewhat of a standard number. This is an annual rate, meaning you will pay .62% of your loan amount each year in mortgage insurance. So, for a $200,000 loan, your annual PMI might be approximately $1,240, or $103 per month.

  • FHA Mortgage Insurance Premium (MIP)

All FHA loans require mortgage insurance. If you have an FHA loan with less than a 10% down payment, you will pay mortgage insurance for the life of that loan. If your down payment is more than 10%, your mortgage insurance will go away after 11 years of payments.

MIP has two types of insurance. The first is upfront mortgage insurance premium, and the second is annual mortgage insurance. The upfront premium is collected at closing, and is typically 1.75% of your loan amount. This can be financed into your loan, so that you do not pay it out of pocket. The annual MIP premium is typically .85% of your loan amount.

  • USDA Mortgage Insurance

The USDA Loan Program will finance 100% of your home purchase. USDA loans typically require both upfront and annual mortgage insurance. The upfront mortgage insurance is referred to as the USDA Guarantee Fee.  This is typically 1% of your mortgage amount, and the annual premium is usually .35% of your loan amount.

  • Veterans Affairs (VA) Loans

VA Loans, available to eligible veterans and dependents, are the only mortgage program that have no mortgage insurance. However, the VA does charge what is called a “funding fee” when you close on your loan. This funding fee is much like the upfront mortgage insurance for FHA and USDA loans. It is typically 2.15% for a first time VA buyer (unless you make 5% or more down payment), and 3.3% for subsequent VA loans. It can also be included in your financed amount. This is one of many reasons that VA loans are very popular for eligible borrowers – no down payment is required, interest rates are typically very favorable, and there are no monthly payments for mortgage insurance. It is also noteworthy that some eligible veterans with service connected disability compensation.

III.  Can I get rid of mortgage insurance?

We talked above about a few ways to avoid mortgage insurance:  

  1. Make 20% down payment on a conventional loan.
  2. Down Payment of 10% or more on FHA Loan +  11 years of payments.
  3. VA Loan for eligible borrowers – no mortgage insurance!

If you’re not in one of those categories, here are a couple of other ways to escape mortgage insurance payments:

  • For a conventional loan, pay your mortgage down to the 80% LTV mark. Mortgage insurance cancels automatically on a conventional loan when your LTV reaches 78%. But, once you reach 80%, you can request cancelation of the mortgage insurance. Because this is based on the loan to value, not necessarily your purchase price, you might want to consider having your property appraised during the life of your loan if you think the value has increased enough to reduce your LTV below the 80% mark.
  • REFINANCE. If you have a government loan in which your mortgage insurance is there to stay for the life of the loan (or at least 11 years, if your down payment was 10%), you might consider refinancing into a conventional loan when your LTV has gone to less than 80% LTV. Again, if your property value increases, you might be able to do this sooner than if you waited until your loan was 80% of your original purchase price.  

Conclusion

Mortgage insurance is another important factor in considering what goes into the costs of your mortgage. Knowledge is certainly power when it comes to buying a home and taking out a mortgage. If you are in the home buying process, be sure that you are asking questions and getting meaningful advice from your loan officer. Call us today if you have questions!

Davis Love
Pathway Mortgage
NLMS: 1866217

Posted by Davis Love on December 16th, 2019 9:40 PM

We all want the lowest interest rate possible when buying a new home, right? I mean, you could be paying that interest for 15-30 years, depending on your loan term. That’s why “what will my interest rate be?” is one of the most popular questions for mortgage applicants.

If you are like me and most other readers, and might get distracted and stop reading soon, take away these three things: 

  1. You can select a higher or lower interest rate, what changes is the cost for that interest rate.
  2. Your credit score is the most important factor in determining the available interest rate.
  3. The pricing for a particular interest rate changes continuously.

Now, if you really want some good information, keep reading!

1.  What an Interest Rate Costs – Pricing and Discount Points 

What many buyers do not know is that you can generally select the interest rate you want. What will change is how much that interest rate will cost.

The discount point is an essential term in selecting your interest rate. A discount point is what you will pay to “buy” your interest rate. Discount points are calculated as follows:

                1 discount point = one percent of your loan amount

So, if you have a $100,000 loan, one discount point would equal $1,000.

Every interest rate has an associated discount point (i.e. price). But, it’s usually a decimal, rather than a whole number. For instance, a particular interest rate might have a price of .250. This means that interest rate would cost .25% of the loan amount, or, $250 for a $100,000 loan. Generally speaking, as the interest rate goes up, the cost goes down. A “par rate” is an interest rate that has 0.0 discount points. For interest rates higher than the par rate, you would receive a credit rather than pay a cost. For instance, a particular interest rate might have a .250 credit associated with it. That means you would actually receive a $250 credit at closing. That amount is subtracted from your cash to close number.   

So, the right question when it comes to selecting your interest rate really is this: how much will it cost to get the interest rate that I want? 

Once you understand the different pricing for different interest rates, you can then analyze which rate is best for you based on how much you would have to pay for the rate. If you plan to live in the house for 30 years and you want the lowest possible total payments over than time period, you may want to pay a higher discount for a lower interest rate. On the other hand, if you are buying your first home and are not likely to own the home more than a few years, you may want to get a slightly higher interest rate with a lower cost, as you will not be making payments long enough to make up the difference.  

The time you plan on remaining in that home is one key factor in determining which interest rate is right for you. Another key factor is your available money. If you only have a certain amount of money available for down payment and closing costs, you will need to limit the costs of your loan, which you can do by selecting a higher interest rate and paying a lower discount point. One additional note to be aware of is that federal guidelines restrict loans known as “high cost” loans. This means that the cost associated with getting your loan cannot exceed a certain percentage of your loan amount. For this reason, you will also have limits on the amount you can pay to lower your interest rate.

2.  Credit Score

You probably already know that your credit score is very important when it comes to getting a mortgage loan. Your credit score is the primary driving factor when it comes to determining what the cost will be for a particular interest rate.

Here’s what you should know: There are typically certain score “thresholds” where the pricing improves for interest rates. For instance, the pricing might be the same if your score is 650 – 679, but might improve if your score is 680.

Why is that important? Well, the first thing you will do when you apply for a mortgage is have your credit pulled. If your loan officer tells you that your qualifying score is 678, an important question would be, “would pricing improve if I increased my score to 680?” Again, the answer to this question is often (but not always) yes.

Of course, the general is the higher your score, the better the pricing. It is important to understand that improving your credit score is almost always the best way to get a better interest rate without a higher cost. But, it’s also important to understand that a higher credit score does not always mean a better price. The pricing typically will only improve at those “thresholds” set by the lender for their particular interest rate.

If you are considering spending significant amounts of money on credit repair prior to applying for a mortgage, it might be beneficial to first find out 1) what is current pricing at your current score, 2) what would pricing be at your target score, and 3) how much money would it save you.

Note that this article is not about qualifying scores, but you should keep in mind that you typically need at least a 600+ score to qualify for a FHA loan (technically 580 qualifies, but you will find most lenders require 600), 620+ for a conventional loan, and 640+ for a USDA loan. If your qualifying score is below those numbers, you will want to see how you can improve your score before applying for a mortgage.

Lastly, you should know that your “qualifying” score is the middle score reported by the three major credit bureaus (Equifax, Transunion, Experian). Unless you have seen your most recent score from each of those three bureaus, you may not have an accurate number for your qualifying score.   

3.  Price changes.

If you are still reading, you probably have looked into interest rates enough to know that they constantly change. What you may not have known before, and hopefully understand now, is that is not really the rate that is changing, but the price for that rate. When you hear that rates went up or rates went down, that means that the discount point, or price, associated with a particular interest rate went up or down.  

Of course, this is kind of the “bad news” when it comes to determining your interest rate. It means that you cannot be sure what the price for your interest rate will be on any given day, and when you get a rate quote, it is always subject to change.

This is important to understand, because you have probably seen advertisements from lenders all over the place, and may have checked “current interest rates” online. These advertisements will always be based on a particular credit score, and will have an associated discount point.

4.  What does all of this mean? 

The important takeaway is this: if you want to know what interest rate is best for you, you need to know what your qualifying credit score is, and what the current price is for the interest rate you want given your score. From there, you will be able to determine what interest rate works best for you.

You can always contact us to find out more!

Davis Love
Pathway Mortgage
(864) 814-0710
davis@pathwaymortgage.org  

Posted by Davis Love on November 20th, 2019 4:04 PM

What’s the first thing you do when you decide you want to buy a home? My guess is you go to Google and search “homes for sale” in the area you want to buy. Or, maybe you search for local realtors and give the first one you like a call. That might make sense, because that’s who you are going to work with when it comes to finding your new home.

But, here’s something a lot of people don’t know: if you start your home search by talking to a loan officer and getting pre-approved, you will be ahead of the game, realtors will be excited to work with you, and you will increase your chances of getting your offer accepted.

I.  Why start with a loan officer?

Here are the two most important reasons:

First, across the state of South Carolina, and most of the nation, we are in what most people call a “seller’s market.” This means that homes are in high demand, and they typically sell quickly, to the first qualified buyer who makes a good offer. In order to be that qualified buyer who comes to the table first with your offer, you need a pre-approval from a lender.   

The second, related reason to get a pre-approval as your first step is that when you make that first call to a realtor, there’s a good chance they are going to ask you this question: “have you been pre-approved?” That’s because realtors know the point above, which is that you need to be qualified in order to make that offer.

So, let’s consider two scenarios.

John meets with a realtor, and says he wants to buy a home for $175,000. John’s realtor Jane does great work, and finds a home that fits all of John’s needs, listed for sale at $175,000. Jane sets up a time as soon as possible to show John the home, but John hasn’t called to find out if he can get pre-approved.

Mary, meanwhile, is working with realtor Mike. But, when she met with Mike for the first time, she brought him a pre-approval letter for $175,000. Mike finds the same home for Mary, and she goes and views the home just after John.

Both Mary and John decide offer the $175,000 asking price on the home. But, Mary is able to attach her pre-approval letter to her offer, while John’s offer is subject to an approval from a lender for the necessary financing.

It’s not hard to guess which buyer the seller is going to accept a contract from. They will take the pre-approved buyer who is one step ahead.

II.  What is a Pre-Approval? 

Now that you understand why a pre-approval is important, let’s talk about what that means. Well, it really means exactly what it says – your loan officer has gathered enough necessary information from you to determine that you can be approved for the loan amount you are seeking. A good loan officer will then confirm that with a letter that states you are pre-approved.

 In order to pre-approve you for a loan, your loan officer will generally need four basic categories of information.

1.  Credit Report

Your credit report is the first key piece of information in getting you approved for a mortgage loan. Your credit report shows your credit score, as well as your debts/liabilities. Your credit score determines whether you meet minimum credit standards to be qualified for a loan. Then, your monthly payment obligations are compared with your monthly income to determine your debt to income ratio. Your debt to income ratio is used to determine the dollar amount of mortgage for which you can be approved. In order to access your credit report, your mortgage broker will have to collect your birthday, your social security number, and your current address.

2. Income 

Your income is, of course, the other factor for your debt to income ratio. Your monthly income is compared to your monthly payments in order to determine the debt to income ratio.  Your loan officer will need to know your current employer, your employer for the past two years, and your current income (hourly pay and number of hours per week/annual salary, etc.). Typically, providing one month of paystubs is the best way to show your income.

3.  Assets 

Your assets can are typically are money you have in different accounts, such as checking account(s) and savings account(s), 401k, IRA, stocks and bonds, and any other form of money accounts in your name. These assets are important for two reasons. First, they are used to verify that you have money available to make any required down payment and pay your closing costs. Second, they are used to determine that you have the required amount of reserves. Reserves are money that you will still have in your account after making your down payment and paying your closing costs, so that the lender can verify that you are able make a certain number of loan payments. Typically, the higher your credit score, the less reserves you will be required to show.

Your loan officer will likely need two months of bank statements to show your assets. Providing those statements up front is the best way to get this information, but you may be able to provide documentation later, and your approval will simply be conditioned on verifying the stated assets are available.

4.  Background or family information

Depending on the loan you are applying for, some other information may be needed. For instance, for USDA loans, your loan officer will need to know how many family members will live in the home with you, and if you have any dependents. Other monthly expenses, like child support, are important to note as well. Your loan officer will go through these miscellaneous items with you prior to getting you pre-approved.

III.  What if you don’t qualify? 

If you find yourself in a situation where you aren’t quite ready to buy a home, a good loan officer will be able to help tell you what steps you need to take in order to be qualified. Perhaps you need to bump up your credit score a few points, but aren’t sure what the best way to do that would be. Maybe you need to save some more money, but don’t know exactly how much you’ll need to get the loan amount you want. A loan officer is your best resource in helping you work through those issues.

This point is also a great way to tell if the loan officer you talk to is one you want to work with. If the loan officer is not willing to spend some time talking to you about what steps you should take to get qualified, that may be a good sign that you should consider calling around to other loan officers.   

IV.  Conclusion

The bottom line is this: getting in touch with a loan officer as soon as you are ready to buy a home will put you one step ahead of the game, and will help you get ahead of the curve when it comes to getting your offer accepted on the home that you love. A good loan officer will be thorough in gathering information from you on your first call or meeting, and will be able to get you a pre-approval letter quickly.  

Posted by Davis Love on October 8th, 2019 9:27 PM

Do you ever wonder what you’re actually going to be paying for every month when you make a mortgage payment? Good news, it’s actually pretty simple. 

For most, your monthly payment is going to include your mortgage payment and your escrow payment. In other words, your monthly payment on your statement is combined into one number, but each month you are paying these items: 

  • Mortgage 
    • Principal 
    • Interest 

  • Escrow Account
    • Mortgage Insurance 
    • Property Taxes
    • Homeowner’s Insurance 

Mortgage Payment 

Let’s go over the mortgage payment first, because that will apply to everyone. Your monthly mortgage payment is simply a set amount of money that is calculated so that the entire principal balance of your loan and all interest that accumulates over the loan term (i.e. 30 years or 15 years) will be paid off at the end of that term. If you have a $200,000 loan, over the term of your loan you will pay $200,000 in principal and a predetermined amount of interest based on your interest rate. But, your payments are designed so that you pay more interest early in the life of the loan, and more principal later in the life of the loan. So, your monthly mortgage payment will always cover both the principal and interest associated with your loan, and the amount paid each month will not change, but the way that payment is allocated changes throughout the life of the loan.  

It’s important to note that this applies only to fixed loans. Other loan types, like Adjustable Rate Mortgages (ARM), might have adjusted payments at some point during the life of the loan.

Escrow Payment 

If your “loan to value” is higher than 80%, you will also have an escrow account. See our previous post on escrow accounts for more details on what an escrow account is. What you should know in the context of your payment is this: if you have an escrow account, your monthly payment will include the payment to your escrow account. If your loan amount is more than 80% of the value of your house, you will have an escrow account. If it is less, you may have an escrow account, or you may be able to choose to pay those items separately. 

The three categories are fairly simple. Your escrow account will include your property taxes, your homeowner’s insurance, and your monthly mortgage insurance payment. On most, but not all loan programs, the mortgage insurance may be canceled after a certain amount of time or reduction of your loan to value below 80%. Additionally, if you have a VA loan, you will not have mortgage insurance.

The escrow payment is where the greater variables lie in determining what your total monthly payment will be. The property taxes and homeowner’s insurance are annual fees that will be divided up for your payments each month. Your lender will perform an escrow analysis at least once a year to ensure they are collecting enough funds on a monthly basis to pay those bills when they are due. So, if your taxes go up (because taxes never go down, of course), or your homeowner’s insurance changes, your escrow payment will change and so your total monthly payment will change. 

And that’s it! There are a lot of numbers involved when you get a mortgage, but if you want to know how your monthly payment is determined, these are the categories where you want to look closely. 

Posted by Davis Love on September 26th, 2019 5:15 PM

Yes. At least, we're pretty sure it is. 

According to Merriam-Webster.com, escrow means “a deed, a bond, money, or a piece of property held in trust by a third party to be turned over to the grantee only upon fulfillment of a condition.”    

...What? 

The truth is, other than a strange word and a complex definition, escrow accounts as they apply to mortgages are pretty simple. 

I mentioned escrow accounts in my last post, “How Much Does it Cost to Get a Mortgage?” I said that, basically your escrow account is a separate account from your mortgage that your lender uses to pay your homeowner’s insurance, mortgage insurance and property taxes.  

What it means is this: when you get a mortgage, you have to pay four things - principal, interest, taxes and insurance (PITI). The principal and interest are what make up your actual mortgage. If you have a $200,000 loan, over the life of the loan you will pay $200,000 in principal, plus a calculated amount of interest based on, of course, your interest rate. 

Your taxes and insurance, on the other hand, can be “escrowed.” As Merriam-Webster would tell you, that means they are held in trust (kept) by a third party (your lender) to be turned over to the grantee (the government and the insurance companies) only upon fulfillment of a condition (when they are due).

So, our dictionary friends of course aren’t wrong. The reason you have an “escrow account” separate from your mortgage is that your taxes and insurance aren’t owed to your lender, but rather to the government and to an insurance company. But, your lender uses the escrow account to collect that money on a monthly basis and hold it for those third parties to pay them when its due. This means that you just one big payment every month, and your lender/mortgage servicer can deal with making sure all the right people get their money at the right time.

When you close on your loan, you’re going to have to fund your escrow account. That’s because the lender wants to have some money in that account in the beginning to make sure they don’t get stuck with a bill with none of your money to pay it. That’s why you will see on your closing documents that you have an “initial escrow payment” that is significantly larger than your monrthly escrow payment will be. 

Note that you aren’t always required to have an escrow account. Most lenders will require them at the beginning of the mortgage, for a certain amount of time, and until the loan reaches a certain loan to value (usually 80%). After that, you might be free to make the taxes and insurance payments directly.

Since we're talking about definitions, it's important to realize that "escrow" is used in a lot of different contexts in the financial and legal world. But, you don't need to worry about that when you're trying to figure out how to pay your mortgage. 

At the end of the day, at least for purposes of a home loan, whether you refer to an escrow account, money that is escrowed, or your escrows, it’s simply a fancy old word used to decsribe the account that holds money you owe for taxes and insurance. You will make an initial deposit into that account when you close on your loan, and then you’ll make monthly payments into the account, which your lender will use to pay the government and insurance company. 

Davis Love 
(864) 814-0710
Davis@pathwaymortgage.org 
NMLS# 1866217    

Posted by Davis Love on September 5th, 2019 2:57 PM


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