Mortgage Definitions: PITI but not the Pity you think.

As we continue the series of Mortgage Definitions brought to by California Home Strategies we take a look today at PITI. This is definitely “PITI” but not the pity you think.

PITI: This stands for Principal, Interest, Taxes and Insurance. If you have a loan with “impounds” which is your taxes insurance are included in your monthly payment then the payment you make every month is PITI. If you have a loan with Mortgage Insurance this would also be included in the monthly payment but is not part of the PITI definition.  PITI is also used in the calculation of your Debt to Income ratios.

It is important to understand what PITI is. Dave Ramsey recommends that you total mortgage (PITI) not exceed 25% of your gross monthly income. Consult your mortgage broker to see what is right for your family. The standard FHA guidelines require a 31/43 Debt to Income.

Thank you again for reading. Until Next Time.

Mortgage Insurance: Definitions in Mortgage

Mortgage Insurancecan be like gum on your shoe on a hot day. In the years 2002-2007 everyone would avoid Mortgage insurance like is was a plague. The way that we would avoid Mortgage Insurance was by getting an first mortgage and combining with a second mortgage. This type of structuring was commonly referred to as 80/20, 80/10/10 or 75/25. This numbers referred to the LTV/CLTV (http://mattfreeman.wordpress.com/2009/03/19/loan-to-value-definitions-in-mortgage-continued/) .

The break-even of an investor that is lending money is considered to be 80% so if you borrow less than 80% than the investor does not need any protection. If you borrow more than 80% on one loan then the investor wants to have protection in the event you default. When you default and they have to take back the property and they have giving 90% of it’s value their loss can be 10% or greater after all the expenses to foreclose. Please be aware that there are a few exceptions to the rule namely VA and USDA loan programs.

This is where Mortgage Insurance comes into play. The mortgage insurance protect the investor when a consumer defaults and repays them for any losses that they may take. Mortgage Insurance can take on many forms and I suggest that you talk to your Mortgage Professional for the one that may best suit your situation. A few of the types of Mortgage Insurance are as follows:

BPMI – Borrower Paid Mortgage Insurance - commonly used with an FHA loan borrower paid mortgage insurance is paid by the borrower on a monthly basis. For FHA there is an Upfront Mortgage Insurance Premium and then the monthly expense. This monthly expense is in addition to your principle and interest payment, your taxes and you homeowners insurance.

LPMI – Lender Paid Mortgage Insurance – As the name states the lender pays the mortgage insurance premium for you in theory. What they do is raise the rate that you would have gotten by a said amount to cover their risk. The increased rate that you pay covers the losses because the rate is above market. (Why would you want this?)

I am glad you asked that question. In 2007, Mortgage Insurance, became tax deductible. (please note that I am not a CPA and any information here is strictly to illustrate my point. Please consult your CPA for your situation prior to making a decision). However, there were some provisions to what and who could deduct this premium. If you make greater than 100K gross you cannot deduct BPMI. Those that are in that category would have better tax benefits going with LPMI because the MI is built into the rate and Mortgage Interest is always deductible(primary residence).

The reason that 80/20 or 75/25 or 80/10/10 were popular was because the first mortgage was under the 80% break-even and the second mortgage would generally attach a higher rate by 2-3% to absorb the risk they were taken. Second Mortgage were also smaller loans.

You may here the terms PMI(private mortgage insurance), BPMI, LPMI, MIP(mortgage insurance premium) and it can get very confusing. I always recommend that you consult your professional to help explain anything you may be unsure of.

To end this summary of Mortgage Insurance I like to always give a few examples of what I might recommend and when we need or do not need mortgage insurance.

Ex. 1 -  Purchase Price 100K and you need a loan for 85K. Do we need Mortgage Insurance? The answer is yes. Since we are borrowing over 80% of the value of the home BPMI or LPMI would be needed. Another way to finance this to avoid Mortgage insurance would be to do an 80% first mortgage and a 5% second mortgage and putting 15% down. However, second mortgages are the 2009 dinosaur equivalent. They are almost extinct.

Ex. 2 – Purchase Price 200K and you need a loan for 160K.  Do we need Mortgage Insurance? The answer is no. In this case the LTV is exactly 80% and at this LTV and below there is no need for Mortgage Insurance.

In summary, Mortgage insurance is a fee that is paid by you and it is to protect the investor that is taking the chance on lending you more that 80% of the value of the home. It can be dropped when your home reaches that 80% LTV range but can be difficult to do. If you have an FHA mortgage they require 60 payments and a LTV of 78% before you an get rid of it.

If you have any questions regarding what is in this post please leave a comment or call me in the office. Thank you for your time.

As Always, Thank you for reading.

Matt Freeman

Loan to Value: Definitions in Mortgage Continued

Buying a new home or refinancing your existing mortgage is something that hopefully everyone will experience at one point in their life. Mortgages are tailored for the individual or couple that is buying the home. They are assessed by the overall risk the investor will have on the loan based on the qualifications of the consumer. Yesterday we discussed DTI or Debt to Income which is the borrowers ability to repay the debt. Today I would like to take a look at the collateral side of lending commonly referred to as LTV or Loan to Value.

Like DTI, Loan to Value is also expressed as a ratio. It is the amount you will finance for the purchase or refinance divided by the value of the home. The home is what is used as collateral and the greater the equity the lower the risk. Another way to put that would simply be low LTV lowers the risk and high LTV increases the risk.

Let’s look at an example for a refinance transaction. You currently owe approximately 150K on your home. An independent appraisal has determined that the value of your home is approximately 300K. The loan to value on your home would be:

loan amount / appraised value = LTV   150K / 300K = 1/2 = 50%.

We never would use the 1/2 in the example as the number is always expressed as a percentage however, for the example I wanted to illustrate the correct math. 50% LTV would be considered as a low risk loan to value. That means that you have 50% equity in the home and in the event the lender had to take back the property via Foreclosure they would be able to sell for a profit.

80% LTV is considered the break even point for an investor that has to foreclose on a property. They spend approximately 20% of the equity in fees, marketing and reduction of price as well as the holding costs if they are to retake the property. This is exactly why they need insurance know as Mortgage Insurance when our LTV exceeds 80%.

Let’s take a loook at another example. You are buying a home and you have 3.5% to put down as a down payment. The home that you would like to buy is selling for 100K. This means that you would need to finance 96, 500K of the purchase:

LTV = Loan Amount/Appraised Value = 96,500k / 100,000k = 96.5% LTV(please note that purchase price and appraised value can be different. In the event they differ on a purchase the investor will base LTV off the lower of the two.)

We have looked at a few basic examples of LTV here today. The last thing that I would like to dicuss briefly is CLTV. CLTV stands for combined loan to value. This is when you have two or three loans on a property. If you have a loan for 100K and a second mortgage for 50K and the value of the property is 300K how would you determine the combined loan to value? Let’s look at an example:

Loan 1 + Loan 2 / Appraised Value = CLTV; 100k + 50k / 300k = 150k / 300k = 50% CLTV.

These are very basic examples and I must tell you that there is always an LTV and sometimes a CLTV. You will have both in many cases:

Example above the LTV = 100k / 300k = 33% and the CLTV = 100k + 50k / 300k = 50%.

CLTV may also be referred to TLTV or HCLTV which are total loan to value and heloc combined loan to value.

I hope that you enjoyed this information on LTV. Stay tuned for definitions of credit and mortgage insurance coming soon.  As always thank you for listening.