Wednesday, March 01, 2006

Buying Real Estate: My Mortgage Lessons Learned

Bottom Line: I highlight some of my personal lessons learned from three home purchases conducted over the past six years.

1. Read “106 Mortgage Secrets All Home Buyers Must Lean – But Lenders Don’t Tell” by Gary Eldred, PhD. First third of book is dedicated to people that need help with credit or qualifying for expensive housing. Remainder is chocked full of level headed comments (AS APPOSED TO THE OTHER BOOKS ABOUT BECOMING A MILLIONAIRE WITH NO MONEY DOWN). The 106 secrets are summarized in the table-of-contents for a quick initial review.

2. Bad U.S. economy news is good news for you when you’re floating your rate (inverse relationship). For example: a high unemployment rate should help you get lower mortgage interest rates. Be mindful of economic news scheduled for release the week or two prior to your intended lock date and pay attention.

3. If you’re buying below fair value, a low appraisal may keep property taxes down but it’ll also make it more difficult for you to shed Private Mortgage Insurance (PMI) later because it’ll take longer to develop an 80 percent loan to value ratio. Generally, it’s best to get a full service appraisal because you have the best chance for the appraisal to come back over your purchase price.

4. If you don’t put 20% down at closing, you generally won’t be able to shed PMI for at least the first 12 months. After 12 months, you’ll generally either have to order a full service appraisal showing that the house is now worth 20% higher than the current loan balance… or you’ll have to refinance. Make sure it’s clear what your mortgage company requires for removal of PMI.

5. Generally, you’ll find that your PMI rate will depend on your FICO score, type of loan and down payment (LTV ratio). Generally PMI monthly premiums reduce with every 5% you put down.

6. If you’re in a situation where it's not likely for you to build 20% equity quickly (to get rid of PMI), consider rates for an 80/20, 80/10/10, 95/5/5 loan (LOAN/Piggy Back Loan/Down Payment). If you can’t get a good rate for one of these loan combinations, ask your loan officer if you can pay your full PMI premium up front. This will allow you to roll the premium over to your home loan and deduct both your home loan interest and a portion of your PMI premium if you itemize taxes.

7. There is generally no difference in the rate you’ll get quoted between 10 yr and 15 yr fixed loans. A 20 yr fixed doesn’t significantly improve you quoted rate (when compared to a 30 yr fixed).

8. Closings via mail: Try and make sure the closing attorney’s office gets the package from your mortgage company no less than 5 business days prior to closing. This allows them enough time to reforward you the paperwork and still allows additional time on your end.

9. Settlement Statement:
a) If doing non-local purchase via mail: Wire fees are usually valid. Remember, closing attorneys are charged wire fees on each incoming wire transfer. It sucks that you have to pay a wire fee on your end and have to cover their expenses associated with receiving your wire and the mortgage company wire transfers.
b) Title insurance premium, refer to article wrote up below on subject

10. Closed on last house (24 Feb 06) with Pentagon Federal Credit Union. There loan officers are paid by the hour (not commission). They offer great rates and do 90 DAY LOCKS for no additional fee. They also pay a good portion of your buyer closing costs. Credit Union membership is open to everybody. I paid a $20 lifetime membership fee and did all paperwork via internet, phone and mail. Locked 15yr fixed at 5.0% (1 point, 20% down paid). Be aware, that some of the rates quoted on their site require 20% down.

I've got more tips; however, current posting is getting a bit too long. Will post more recommendations in future.

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