Don't pay too much for a loan lTC

October 20, 1991|By James M. Woodard | James M. Woodard,Copley News Service

Your monthly home mortgage loan payment may be larger than necessary. Here's why:

Most lenders require "private mortgage insurance" coverage for all high-ratio conventional loans. These include home mortgage loans for amounts of more than 80 percent of the property's market value. The insurance protects the lender's interest, not that of the home buyer-borrower.

PMI coverage costs the buyer a significant chunk of money. The premium is usually charged in the form of an upfront fee and a continuing surcharge with monthly payments.

Typically, one pays 0.5 percent of the loan amount at closing, to cover the first year's premium. Then there is an annual rate of 0.43 percent of the loan amount, paid monthly for the first six years. After that point, there is an annual rate of 0.22 percent of the loan amount, according to Tom Cross of 1st Nationwide Bank.

For example, if you purchased a home for $200,000 with only a 10 percent down payment, you would need a mortgage loan in the amount of $180,000. The lender will probably require PMI coverage for that loan, costing you $900 at closing and adding $64.50 to your principal-interest monthly payments.

That monthly surcharge should be eliminated when the loan balance is lowered to the point where it's less than 80 percent of your home's value. That's achieved by amortizing the loan down with payments and/or documenting an increase in the property's market value.

With the lower loan-to-value ratio, the lender's risk is reduced and PMI coverage is no longer needed.

But the monthly surcharge probably will continue indefinitely until the buyer petitions the lender to cancel the premium charges added to monthly payments. Once this action is taken, and the lower ratio is documented, the PMI premium surcharge will probably be terminated.

But the premium cancellation is at the discretion of the lender, Mr. Cross said.

In some cases, the total PMI premium is financed -- added to the loan amount. That total premium is usually from 2.5 percent to 3 percent of the loan amount, Mr. Cross said.

In the above example ($180,000 loan), the financed PMI premium would be from $4,500 to $5,400. And, of course, the buyer would be paying interest on that amount throughout the loan term.

Lenders require PMI coverage for two reasons: They feel it's important to reduce their risk for high-ratio mortgage loans, and their loans must be insured to make them salable to the secondary market.

A few mortgage lending firms now self-insure their high-ratio loans, according to Cliff Norton, owner of a mortgage brokerage firm. These lending companies promote the fact that they accept high-ratio loans without the cost of PMI coverage. But they quietly kick up their basic interest rate a bit to cover their risk, Mr. Norton noted.

Most home mortgage loans are 80 percent or less of the property's market value, thus eliminating the need and expense of PMI coverage. And that's the best way to go, Mr. Norton advised. But there are a significant number of home buyers who need the high loan if they are to buy the home of their dreams.

Another way some homeowners pay too much in monthly payments is in the calculation of adjustable interest rates.

These rates are usually tied to an index that is respected as a credible indicator of prevailing interest rates and is readily available for public review. But one research firm recently reported that nearly a third of adjustable-rate loans are being incorrectly calculated for rate adjustments.

Don't be too trusting. Check the index against your adjustable interest rate.

And be sure to petition your lender to cancel the PMI premium surcharge when your loan balance dips below 80 percent of your home's value.

Q. Is Prudential phasing out its real estate brokerage operations?

A. No, those operations are expanding. Prudential Real Estate Affiliates is now the fourth largest real estate network in the country, generating $29.1 billion in sales last year alone.

Sales for the Prudential real estate network during the first seven months of this year increased 13.9 percent, and transactions were up 7.7 percent compared with the same period last year.

Prudential's performance outpaced the industry, which reported an increase of 3.9 percent in sales volume and a decrease of 1.8 percent in transactions for the first seven months of 1991, according to a Prudential report.

Q. Is the value of farmland increasing or decreasing?

A. Farmland has been generally increasing in value the past five years. In some areas, those value increases are now leveling off.

In Iowa, for example, farmland values are up by about 45 percent since the fall of 1986, according to a recent report from the Iowa Chapter of Realtors Land Institute. Values in the corn state are leveling off, the report stated.

Send inquiries to James M. Woodard, Copley News Service, P. .O Box 190, San Diego, Calif. 92112-0190.

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