What is Mortgage Insurance

A few days ago, a first time home buyer asked me, “How many insurance policies do we have”? It really is a bit confusing when you start looking at the additional monthly costs of obtaining a loan. There are actually two insurance policies you need when financing a home. The first is your standard homeowners policy, which covers the structure and personal property against loss. The second is a Mortgage Insurance Premium (MIP) for a FHA loan or Private Mortgage Insurance (PMI) on conventional mortgage, where the borrower has less than 20% down payment. Both are a lender fee for an insurance policy which protects the lender from loss if the home owner should default on their loan. Mortgage insurance premiums are calculated by risk based pricing. They take into account the percentage of the purchase price you are financing, as well as your credit score. Typically, rates range from .5% to 1.5% of the loan balance. If you have a $100,000. loan balance at .5%, you would calculate your mortgage insurance by multiplying $100,000 x .5 , which equals $500.00. Divide $500.00 by 12 and your monthly PMI payment would be $41.67 a month. As you pay down your...

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Simple Real Estate Definitions : Short Sale

A "Short Sale" is when a home seller sells his home for a lesser amount than what is owed on his mortgage, and the mortgage lender agrees to accept the lesser amount in lieu of a full payoff.

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Simple Real Estate Definitions : APR

APR is an acronym for Annual Percentage Rate.  It’s a government-mandated calculation meant to simplify the comparison of mortgage options. A loan’s APR can always be found in the top-left corner of the Federal Truth-In-Lending Disclosure. Because APR is expressed as a percentage, many people confuse it for the loan’s interest rate.  It’s not.  APR represents the total cost of borrowing over the life of a loan.  “Interest rate” is the basis for monthly mortgage repayments. The main advantage of APR is that it allows an “apples-to-apples” comparison between loan products. As an example, a 5.000 percent mortgage with origination points and fees will almost certainly have a higher APR than a 5.500 percent mortgage with zero fees.  In this sense, APR can help a borrower determine which loan is least costly long-term. However, APR is not without its shortcomings. First, different banks includes different fees into their APR calculations.  By definition, this spoils APR as a choose-between-lenders, apples-to-apples comparison method. And, second, when calculating APR, “life of the loan” is assumed to be full-term.  When a 30-year mortgage pays off in 7 years or fewer — as most of them do — APR comparisons are rendered moot. In other words, APR is just one metric to compare mortgages — it’s...

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Real Estate Terms : Escrow Account

An escrow account is a designated savings account into which funds get deposited for a specific purpose. With respect to real estate and home loans, escrow accounts are used to pay real estate tax bills and homeowners insurance payments. Escrow accounts are managed and disbursed by lenders. When a homeowner “escrows” his mortgage, along with his scheduled monthly mortgage payment, he must also send an additional payment to the lender equal to 1/12 of the home’s annual real estate tax bill plus 1/12 of the annual homeowners insurance bill. By sending a pro rata portion of the tax and insurance bill each month, the homeowner’s escrow account will always, in theory, have enough funds to make payments in full as tax bills and insurance premiums come due. In Indianapolis, taxes are currently behind and the amount you have escrowed may not cover the amount of the certified taxes when they are posted.

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Real Estate Terms – FICO

The basis of most mortgage lending is credit scoring.  In general, the higher a person’s credit score, the lower his offered mortgage interest rate. Despite the many credit scoring models in use today, however, just 3 are relevant to American homeowners: The Equifax BEACON® score The Experian Fair Isaac Risk Model The TransUnion EMPIRICA® Generically, these scoring models generate what are commonly known as “FICO” scores. FICO scores are measurements of probability.  The higher a person’s credit score, by definition, the less likely a person is to default on his home loan.  This is one reason why credit scoring has added importance lately — mortgage lenders are very careful about what they’re lending and to whom. Notably, minimum FICO thresholds have been added to all types of mortgage loans. FICO scoring has 5 main components as listed above.  Payment history and credit capacity are two of the largest pieces, but a myriad of other factors contribute to a credit score, too.  For example, the longer your reported history of managing credit, the more favorably your credit score will respond. The myFICO.com website does a terrific job with credit education, explaining in plain language the ins-and-out of credit scoring and ways to boost your...

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