Author: Michael Scott

Removing that pesky Private Mortgage Insurance (PMI)!

I like saving money, don’t you!! So, how can you make that line on your monthly mortgage statement called Private Mortgage Insurance, better known as PMI, go away? PMI is often misunderstood and we quite often hear from borrowers, loan officers and realtors the popular statement of “all PMI stops at 80%”. However, that’s incorrect and there are definite nuances that you should know about so let’s review PMI.

Let’s drop that PMI aka saving money …..

If you took out a conventional (Fannie Mae or Freddie Mac) loan when you purchased your new home and didn’t put down a 20% down payment, then odds are you have PMI on your loan. For some homeowners, refinancing is the ideal way to drop PMI, because they can also lower their interest rate and save a great deal of money. But the good news is refinancing is not the only way to rid yourself of PMI. This monthly cost can be eliminated when certain criteria is met. In fact, Federal law (The Homeowners Protection Act of 1998 or HPA Act) requires loan servicers to terminate PMI when these conditions are met and provides three options for terminating PMI.

 Option 1 – Borrower Requested PMI Cancellation: Once the loan balance is paid to under 80% of the original price, the borrower may request (in writing) that PMI be cancelled on the cancellation date. The cancellation date means either the date when the principal balance is first scheduled to reach 80% of the original property value (lower of purchase price or appraised value) or date on which the principal balance reaches 80% of the original value based on actual payments. The borrower may make extra payments to move up the cancellation date. For this option the following conditions must be met:

• You submit a written request for cancellation

• Borrower must be current on the loan.

• No additional subordinate liens

• Must provide evidence satisfactory to the note holder that the current property value has not declined below its original value (usually the original sales price). This basically means you will probably end up paying for a new appraisal. If trying to use current value (presumably higher) than please note most loan servicers have a minimum 2-year seasoning requirement. In addition, if the loan has been seasoned for less than five years than Fannie/Freddie Mac will require the LTV to be below 75% if you are using current value (which is presumably higher than the value at the time of purchase).

Option 2 – Automatic PMI Cancellation: Better news …. Even if you don’t ever ask, your servicer still must automatically terminate PMI on the date when your principal balance is scheduled to reach 78 percent of the original value of your home. For your PMI to be cancelled on that date, you need to be current on your payments on the anticipated termination date. Otherwise, PMI will not be terminated until shortly after your payments are brought up to date. “Good payment history” means no payments 60 or more days past due within 2 years and no payments 30 or more days past due within 1 year of the later of the cancellation date or the date you submit a request for cancellation. To determine the “automatic” cancellation date ask for an amortization schedule and then see when the loan balance will reach 78% of the original purchase price.

Option 3 – Final Termination at the Mid-Point: If all else fails you can still drop PMI on most conforming loans. This “final termination” is at the midpoint of the amortization period. For example, on a 30 Year loan the PMI must terminate after 180 payments (as long as the Borrower is current).

Outside the Box …..

There are a few instances when Option 1 and 2 do not apply. These include when PMI was required and the loan was either a second home or investment purchase or the property type was a 2-4 unit. These types of loans are considered “high risk” and are not subject to the HPA rules. However, as long as the Borrower is current, PMI must still be terminated under Option 3. The other category is for Lender defined High Risk Non-conforming loans (better known as Jumbo loans). This loan type is also not subject to the HPA Borrower requested or Automatic termination features. Nevertheless, PMI for these loans is required to be dropped when the loan is scheduled to reach a 77% LTV based on the lower of the original value or original loan balance (and you are current on your mortgage payments).

Out of luck if …..

It’s important to note that Private Mortgage Insurance (PMI) is for conventional loans, not Government-backed loans such as FHA, VA or USDA. But let’s still give you a run-down on these loan types.

FHA – In addition to the upfront MI you paid (or most likely financed) when you took out the loan, FHA charges a monthly MI fee. The majority of FHA Borrowers fall into one of two scenarios. Scenario A – Sorry, but if you put down less than a 10% down payment than this monthly MI fee will continue for as long as you have the loan. The annual MI fee percentage (currently 0.85%) on FHA Loans remains in place for the entire 30-year term but because it is based on the remaining mortgage balance, the dollar amount decreases slightly each year as your loan balance amortizes down. Scenario B – If you did put 10% or more down as the down payment than the monthly MI will be eliminated after 11 years.

USDA – Similar to FHA, this loan type also has an upfront and monthly MI fee. The annual fee (currently 0.35% X the loan balance) is recalculated each year based on the new balance of the mortgage. The annual fee percentage on USDA loans remains in place for the entire 30-year term but because it is based on the remaining mortgage balance, the dollar amount decreases slightly each year as your loan balance amortizes down.

VA – Thankfully, VA loans do not require monthly PMI so you don’t have to worry whether it falls off or not. However, like all government-insured loans, VA loans do have a funding fee which is an up-front fee that is customarily financed on top of the loan amount.

Written by Michael Scott

michael.scott@capstarlending.com

MCC Program – Texas Mortgage Credit Certificate Program

As you may have noticed, we’ve been blogging a lot lately about mortgage assistance programs that are offered through state housing agencies in Texas. Today, we’d like to introduce you to the Texas Mortgage Credit Certificate Program also known as “MCC Program.”

The MCC Program is a great opportunity for first time home buyers and low to moderate income individuals and families who who wish to buy a home. If you think you may qualify for the MCC Program, don’t hesitate to call us. For now, let’s learn more about this opportunity. Many lenders don’t take the time and effort to participate in these worthwhile programs but we do!

What Exactly Is The MCC Program?

One of the many advantages of home ownership is the fact that the interest you pay is tax deductible. All homebuyers, regardless of income, may take advantage of this mortgage interest deduction feature. If you file itemized returns (which most home owners do) than you can include any interest you pay towards your mortgage (with certain restrictions) in your total itemized deductions. Having an MCC Certificate issued is like “turbo charging” your tax advantage. This occurs because the Texas Mortgage Credit Certificate allows the homebuyer to claim a tax credit against their federal income tax liability for as long as they occupy the home and pay interest.

There is a big difference between a tax credit and a tax deduction. With a tax credit you get to reduce your tax liability on a dollar-for-dollar basis. For example, if your overall tax liability is $5,000 and you have the maximum MCC credit of $2,000 than your total tax bill is reduced to $3,000.

Who Is Eligible For The MCC Program?

Eligibility for the issuance of an MCC is open to individuals and families who meet income and home purchase requirements below:

  • have not owned a home as primary residence in the past three (3) years;
  • meet the qualifying requirements (including income limitations) of the mortgage loan;
  • will use the home as their principal/primary residence. As long as you occupy the property as your primary residence the MCC tax credit will be available to you. You must file IRS Form 8396 with your federal income tax return. The form can be obtained from the IRS web site at www.irs.gov.
  • used primarily in conjunction with the purchase of a home. An MCC Certificate can only be issued on a new refinance if there was an MCC Certificate issued on the original loan.
  • Homebuyer Education required – the homebuyer must complete a Homebuyer Education course prior to loan closing. There are courses that you can attend in your area that your lender can direct you to, or you may complete the course online. Either way, a certificate showing the completion of an approved homebuyer education course is required to close the loan.

There may be other requirements and restrictions, so speak with your qualified lender to determine these.

The MCC program can be used with all types of mortgages. So whether your loan is conventional, FHA or VA the MCC credit is available to go along with it.

Finally, I do want to point out that the Department of Housing and Urban Development (HUD) has designated certain areas as “Targeted Census Tracts.” If you purchase a home in these areas, you do not have to be a first-time homebuyer and income and sales price limits are higher. In addition, there is a potential waiver of the first-time homebuyer requirement for eligible Veterans.

Please see your lending professional for further information on these exceptions.

Other restrictions apply and vary by the state, city or county that administers the program.

How Much Of An MCC Program Tax Credit Can You Receive?

The total tax credit depends on the size of the loan and the interest rate you are paying but the tax credit you receive will be 40% of the annual interest paid. In no case can the tax credit exceed $2,000 per year. However, if you have a credit that exceeds your tax liability for the year you may be able to carry it forward for use in the subsequent years.

Finally, the remainder of the mortgage interest not taken as a tax credit will continue to qualify as an itemized tax deduction. How you decide to take advantage of this savings depends on how you file your taxes. You may choose to take a tax credit or a mortgage interest deduction. Your lender and/or financial adviser will be able to advise you based on your goals and individual tax situation.

MCC Program Fees?

As with any mortgage product there are regular closing costs that are associated with closing your loan. The In addition, there will be an MCC Issuance or Participation Fee of 1% of the total loan amount. Going back to our previous example of a $150,000 loan – you will pay a $1,500 MCC Issuance fee to have the MCC issued. Again, actual amounts will vary depending on your loan size, but the additional MCC fee will be 1% of the loan.

Potential Recapture Tax Due

The MCC program is funded with proceeds from tax exempt Mortgage Revenue Bonds. Since this is a federally subsidized program, you may be subject to a Recapture Tax. The Recapture Tax calculations can be very confusing and the determination of whether you are subject to any Recapture Tax can only be made at the time of sale of your property. Your lender will provide you with a disclosure that will explain the rules for the Recapture Tax.

Please note there are some exceptions provided that result in no tax due. In general, if you sell your home within the first nine years and your income has gone up substantially than you may be subject to this additional tax. General information on Recapture Tax can be found in Section 143(m) of the IRS Code, or by logging on to www.irs.gov.

I hope this has been a helpful recap of the Mortgage Credit Certificate program.

Capstar offers this program through various agencies including the Texas Department of Housing and Community Affairs (TDHCA), Southeast Texas Housing (SETH) and Texas State Affordable Housing Corporation (TSAHC). Tweet this

If you or someone you know might benefit from this program than please email michael.scott@capstarlending.com or call 512-459-2419 for more details. NMLS#216603

The Fearless Mortgage Rate Blog

OK – the world has kept spinning even after the Federal Reserve said they would start “tapering” beginning in January.  In fact, while rates might (I said might) move slightly higher from here, I’m all for it.  Why, you ask – don’t higher rates hurt your business?  Well, maybe in the short run they do.  But putting a longer term perspective on things (and I have that long-term view since I’ve been in the business for 27 years), I would view the fed’s pullback as healthy since it signals an economy that is on the mend with employment improving throughout the economy.  While we can always use a bit faster growth I’ll take anything in the way of an improving economy for now given the issues we have weathered since the initial downturn/correction that began in 2008.

As to my earlier point, I’m not totally convinced that rates will move materially higher from here.  There are a couple of factors at work that I think will mitigate any significant rise.  First off, measures of inflation (at least as measured by the Feds) remain subdued.  With wholesale inflation measured year-over-year at around 1.20% (recent PPI statistics), mortgage bond investors appear to be being adequately rewarded today at a “real” rate of return (after inflation) that is above historical norms.  Finally, what’s lost with the Fed announcement of their tapering is that, given the significantly lower mortgage supply, they don’t have anything to buy anyway!  Therefore, the perceived reduction in “demand” is totally mitigated by the reduced “supply” and should provide a ceiling for rates.  Consequently, my muddy crystal ball says rates can pause here as the traders and banks adjust to a Fed that is trying to take away the punch bowl ever so slowly.

If you are starting to think about buying that first home or eyeing a move up then remember that rates are still awfully low by historical standards.  Finally, if I can help you in any way than I hope you will give Austin’s “home grown” mortgage banker an opportunity to help

Michael Scott/Residential Mortgage Loan Originator/NMLS#216603