This is a mortgage blog.

Designed to educate consumers and real estate professionals about home mortgages.

What is mortgage insurance and why do I have to pay it?

Let's start with the basics - what is mortgage insurance?

What is Mortgage Insurance?Many homeowners feel mortgage insurance is imposed on them by banks for no reason and they don't benefit from it in any way. The reality is that without mortgage insurance, many of those same people would not be homeowners.

I feel it is important to note that this post is not about homeowner's insurance, which is required on all mortgaged properties and protects the home and its contents against loss.

Mortgage insurance covers a lender in the event of a foreclosure. Most homes that go into foreclosure sell for less than market value, so if a homeowner doesn't have much stake in a home, the lender is the one who actually loses money. This is where mortgage insurance comes into play. On purchases with less than 20% down payment or refinances with less than 20% equity in the home, a homeowner obtains a mortgage insurance policy to cover the lender in the event of a foreclosure.

Without mortgage insurance, one of two things would happen:

How do I cancel my mortgage insurance (PMI/MIP)?

Mortgage insurance allows some people to purchase or refinance a home with less than 20% down payment or equity. While it provides a service and helps more homeowners into homes, mortgage insurance is an added cost that should be canceled as soon as possible. First I'll discuss the two main categories of mortgage insurance and then how to cancel each.

Canceling Mortgage Insurance


PMI stands for private mortgage insurance and may be attached to conforming, jumbo or USDA home loans. MIP stands for mortgage insurance premium and is required on all FHA loans.

Canceling PMI

The cancellation of PMI was addressed by the Homeowner's Protection Act (HPA) in 1998. Effective after July 29, 1999, certain rules apply to the cancellation of PMI. You can read the HPA documents here.

The first rule set forth by the HPA was that PMI is automatically canceled when a homeowner reaches 22% equity in the property. Another way of saying this is that it is automatically canceled at 78% loan-to-value. The 78% figure is based on the original purchase price and amortization schedule and the homeowner must be current on the mortgage in order for automatic cancellation to apply.

How much do I need to put down on a house?

Mortgage Down Payment
Down payment options for purchasing a new home vary by loan program. Here's an overview of the most popular mortgage types and their minimum down payment qualifications. I've also included information on the mortgage insurance that is or isn't involved in each program because I believe down payment shouldn't be the only factor when making a mortgage decision.

Conforming Mortgages

Conforming loans are the most popular loans and are often mistakenly referred to as conventional loans (another post for another time). These loans conform to the guidelines of Fannie Mae and Freddie Mac - two mortgage giants. By following conforming mortgage guidelines, lenders are able to sell their loans on the secondary market, which is advantageous to the lender. Read this article to understand why a lender's ability to sell mortgages benefits everyone: Why are home mortgages sold?

Among the most important guidelines Fannie Mae and Freddie Mac set is the minimum 3% down payment (as of 12/13/2014, available for first time homebuyers only).

How do biweekly mortgage payments work?

What are biweekly payments and why do people choose them?

Bi-weekly mortgage payments
Biweekly payments are half mortgage payments made every two weeks. They are a subtle way of paying down principal without paying large lump sums of money at a time. For most people, paying half a mortgage payment every two weeks doesn't feel any different than making one payment each month, especially those people who are also paid biweekly.

Here's why they are not the same:

There are 52 weeks in a year, so paying every 2 weeks is 26 half payments. 26 half payments are equal to 13 full payments annually instead of 12 monthly payments.   

How much of a difference do biweekly payments actually make?  

What is a good debt-to-income (DTI) ratio for a home mortgage?

I'll answer that question at the end of this post. I think it is important to cover the basics first.

What is a debt-to-income ratio?

Debt-to-income ratio
Debt-to-income ratio (DTI) is just another way of saying money out vs. money in each month. Lenders use it in order to determine whether they believe a borrower will be able to reasonably repay a loan.

Which debts are included?

The debt portion of a DTI ratio is calculated by adding the amount of monthly payments on all recurring debts. These debts are almost always included:

  • Car payments
  • Minimum credit card payments
  • Expenses for the home being purchased or refinanced
  • Expenses for other real estate owned
  • Student loans*
  • Child Support
  • Alimony/spousal support
  • Other installment loans (boat, RV, recreational vehicles, lines of credit, etc.)

Why is a mortgage payoff higher than the current principal balance?

The concept of payment in arrears.

Mortgage payoff balance
Many people look at their mortgage statement and assume that the current balance is how much it would take to pay off the loan. The truth is that the interest on a mortgage is paid in arrears, so the balance is always lower than the payoff figure. Payment in arrears means that each month's payment is actually paying the interest for the previous month (example: interest for January is actually paid with the mortgage payment on February 1). Think of it like the electric bill - it is paid after the service is used.

The idea of payment in arrears means that whenever a mortgage is paid off, the amount owed is more than the current balance. A certain amount of interest is added for the time that has passed between the last mortgage payment and the date the loan is paid off. This amount will vary depending on the interest rate of the loan being paid off, the amount owed and the day of the month the loan is paid off. A good conservative estimate for the interest amount is about 75% of the current monthly payment.  Add that to the current principal balance of the loan and you have a ballpark figure for a total payoff amount. 

**Important note: FHA mortgages traditionally charged a full month of interest upon payoff regardless of what day of the month the loan was paid off. This policy is changing soon and FHA will no longer be able to charge a full month's interest after January 21, 2015. Read more about this here.**

The myth of skipped mortgage payments.

How are appraisal values determined on a home?

What really affects value when it comes to a home appraisal?

Appraisal home valuesI hear the following statement a few times a day, "My neighbor's house is listed for X and mine is bigger, so my house must be worth Y." Replace X and Y with values that make sense in your neighborhood and you've probably heard it too. For this reason, I am going to go over the basics of how a residential appraiser calculates home value. 

*This is not how commercial properties are valued, but that's another subject for another blog.

Recent comparable sales are everything. 

Residential appraisals are based on the three most comparable recent sales ("comps"). More than 3 comps may be used, but typically the three most comparable are given the majority of the weight. A common mistake homeowners make is comparing their home with another that is listed for sale pending sale, but not actually sold. Just because someone lists a home for $1,000,000, doesn't mean that it's worth that much or that someone would pay that amount for it. Pending sales and listed homes may be added to an appraisal report for a little extra support, but they cannot be used as a true comp unless they are closed and ownership has changed hands.

Appraisers usually try to stay within 1 mile for distance and 6 months for age, but this is not always possible. When it isn't possible, the best available comps are used. In large metropolitan areas, it isn't very difficult to meet these standards, but in rural or sparsely populated areas, exceptions must be made.

What documents are required to get a mortgage?

What documents will I need to provide to get a home loan?

Some loans will require more or less documentation, but these are the basic documents required by the majority of lenders on average mortgage transactions: 

Employed borrowers: 
Required mortgage documentation

  • Two most recent years of W-2 forms 
  • Two most recent years of federal tax returns, personal (all pages)
  • Most recent 30 days of pay stubs 
  • Current mortgage statement (if refinance) 
  • Purchase contract and copy of earnest money check (if purchase) 
  • Two months statements for any asset accounts (checking, savings, 401k, IRA, etc.) 
  • Homeowner's Insurance agent's name and number
  • Copy of driver's license or passport

Self-employed borrowers: 

How to shop for mortgage interest rates.

Many people reading this article may not have much experience comparing interest rates and lenders and may be avoiding shopping for a mortgage out of anxiety. Here are some dos and don'ts from someone who works in the mortgage industry to help you navigate the experience:

    Don't fill out multiple loan applications.

    You don't need to complete a full mortgage application to receive an interest rate and fee quote. Some companies will train their employees to get an application to further the sales process before telling you what they can offer. The reality is that they can accurately quote you rates and fees without a credit report or loan application (assuming you provide them with enough information). It is important to note that the rate quote will be based on the information you provide. The home value, credit score or some other piece of information may change things later, but at this stage you are comparing lenders and the reality is that the best lender for you at a credit score of 740 is probably still the best lender for you if your score turns out to be 680.  

    Do provide the lender with all the details.

    What are the steps involved in the home mortgage process?

    Every home mortgage process is a little different, but nearly all loans follow this same timeline of events.

    Here is a quick overview of the steps nearly all loans will follow before the mortgage officially closes. 
    1. The Application: In order to begin the loan process, a prospective borrower must first fill out an application.  There are three typical methods to complete this portion of the loan process; an online application, a face-to-face interview or a phone interview. Most of the information contained in the application is something a borrower would know off the top of their head, but some things require extra research.  
    2. The Documentation Stage: In order to close a mortgage quickly and efficiently, it is imperative that the borrower follows up the application with the supporting documentation. Any delay by the borrower in gathering documents at this stage delays the entire loan process. The list of documents required varies greatly depending the circumstances of the borrower. Some mortgage professionals will collect only the bare necessities at this stage of the process to push the loan forward, while others proactively request everything they know will eventually be required at some point in the process. I personally believe it is best to provide as many relevant documents as possible upfront to lower the possibility of last minute issues or rushes.
    3. The Appraisal & Title Work: The next step in the process is to order and schedule the home

    Arizona - Get rid of your monthly FHA Mortgage Insurance Premium (MIP) already!

    Homeowners in Arizona with FHA loans should all take a good look at their home's current value to see if refinancing into a conforming home loan is an option.

    Arizona FHA MIPIt's no secret that home values have risen significantly over the past year or two here in Arizona. AZCentral estimates between 15-45% in the greater Phoenix area (info here). Many homeowners who purchased in the last few years chose an FHA loan because of the low down payment options. What those homeowners don't realize is that they may be able to refinance out of their FHA loan and into a conforming loan with lower monthly mortgage insurance or possibly no mortgage insurance at all!

    Not everyone's home has risen enough to take advantage of this possibility, but there are many people out there who would greatly benefit from it that haven't even considered it an option.

    What are the advantages and disadvantages of refinancing from an FHA to a conforming loan?

    Purchasing a Home - Who are the people involved?

    In a typical home sale involving financing, these are the major players involved and some info about the role each plays:

    Buyer's Agent: 

    Home purchase rolesThe buyer's agent is a real estate agent or Realtor who acts on behalf of the buyer in order to secure a new

    property. This typically involves searching for properties, negotiating on a buyer's behalf and generally acting

    in the buyer's best interest. Home shoppers and buyer's agents may or may not have an actual signed agreement in place for exclusive representation.

    Listing Agent (Seller's Agent):

    The listing or seller's agent represents the other party involved in the transaction, the seller. In a typical home sale, the seller enters into a listing contract with a real estate agent for the exclusive