Mortgage Q&A: What is Private Mortgage Insurance or PMI?

If you are a first-time home buyer, with not a lot of money in the bank, you will probably hear the term "pmi" or "private mortgage insurance" sometime in the mortgage process. This is because private mortgage insurance is required on all mortgages where the loan-to-value ratio is 80% or greater. To put this in simplified terms, if you buy a house that is $60,000, and you are unable to put $12,000 (20%) down as a down payment, you will have to pay private mortgage insurance. This is actually to protect the lender from you defaulting (not paying) on your loan.

As a buyer, you will probably want to get rid of the private mortgage insurance (PMI)as soon as possible, because it is not tax deductible, and you never see it again. It really does nothing to help you. Unfortunately, you will probably not receive notification from the lender when you have paid off enough of your mortgage to be able to stop paying PMI. So you will need to carefully look at your mortgage statements to keep track of the debt to value ratio of your loan. Whenever it falls below 80%, you will then be able to make arrangements to drop the PMI.

Even if you haven't paid enough money down, you may be able to drop PMI if your house has appreciated in value. For example, if you buy a house for $60,000, and you remodel it, and the value goes up to $80,000, you can get it re-appraised and drop the private mortgage insurance.

Whichever way is best for you, be sure to keep watching your mortgage statements, and do everything possible to drop the private mortgage insurance as soon as possible. For other tips, see www.mortgage-refinancing-online-guide.com. Also, talk carefully with your mortgage professional before signing on to any loan agreement.

Can I Afford to Buy a House?

Many people wonder if they can really afford to fulfill their dream of owning their own home, or how much of a home they could afford. They wonder what a lender will look at in deciding how much of a mortgage they can get. If this is what you are asking, here are a few things to consider:

1. First, a lender will look at how much of your monthly income before taxes is going into paying off debts. Frequently, they will use the 33/38 ratio. This sounds confusing but let me break it up simply: 33% of your income can go into housing costs (mortgage, insurance, taxes, etc) and 38% of your income can go into your regular consumer debts (loans, credit cards, car payments,etc.) Guidelines may be flexible or vary with different types of mortgages such as FHA & VA (veterans) mortgages.

2. Lenders will only count income that can be documented on paper. This is based on your gross income before taxes. One shortcut way to calculate your monthly income is to add the last two years income on your W2's and divide by 24 (for 24 months). This should give you a fairly good idea of what your monthly income is. If you are receiving 1099 income or are self-employed, you will need tax returns from two years to document what you are earning.

This information should be able to help you figure out how much home you can afford. You can also find additional facts on websites such as www.mortgage-refinancing-online-guide.com. If you are serious about buying a home, be sure to consult a mortgage professional.

Mortgage Q&A: What are points?

If you are looking at buying a new house, or considering refinancing your current dwelling, you probably have a number of questions. One of the common questions involves mortgage banker terminology. One of these terms is "points". You are often given the option of whether or not you want to pay "points" on your loan.

At first glance, you may immediately decide you do not want to pay points, as your initial down payment will be higher. However, once you understand what a point is, you may want to reconsider your first impression.

A point is 1% of the total loan amount, and paying a point will reduce your interest rate throughout the entire life of your loan. This will save you money throughout the whole time you have your mortgage. In other words, you can either pay a point now, or pay that amount plus the interest on it later. Either way, you will pay eventually.

Before deciding whether or not to pay points on your mortgage, ask yourself how long you plan to stay in your house. If you are planning to move or refinance within the next four or five years, you may not save any money by paying points. If you are going to live in your house for a long time (and not refinance), points are most likely a good option for you.

When comparing rates from different lenders, be careful to look closely at exactly what rates you are getting, and how many points you have to pay to get those rates. Choose wisely based on how much money you have, how long you plan to stay in your house, and how much interest you want to pay long-term.