February, 2002 Newsletter
+++++++++++ February 1, 2002 +++++++++++++++++++
Introduction: Record Year for Home Sales
Mortgage Rate Update: Rates Decline
This Month’s Tip: Understanding PMI
(Private Mortgage Insurance)
Introduction :A Record Year for Home Sales
Welcome to the February edition of the Home Buyer’s
The amazing resiliency of the U.S. housing market
continued virtually unabated through the end of
2001. Although sales of previously owned homes
declined in the month of December by .8%, for the
entire year of 2001 sales of resale homes rose 2.7%
to 5.25 million units according to the National
Association of Realtors. This was a record year,
surpassing 1999’s level of 5.21 million units.
New home construction also saw a record year for
2001. A record 900,000 new single-family homes
were sold last year, surpassing the record of
886,000 set in 1998, the Commerce Department reported.
Much of this activity can be attributed to the very
favorable mortgage interest rates that were available
thoughout the year. With rates predicted to remain
close to current levels in the near future, the
chances are good that housing activity will continue
to remain at high levels. In addition, a rebound in
the overall economy could be even more advantageous
to the housing market.
Mortgage Rate Update: Rates Decline
Generally, mortgage rates declined throughout
the month of January. Average rates on 30-year
fixed loans decreased from 7.14% (excluding points)
at the beginning of the month to an average of
6.96% as of January 24th. At the same time,
15-year fixed rates declined to an average of
6.44%. Barring any unforeseen changes in the
economic picture, most analysts see rates staying
in this same general range over the immediate
For current average mortgage rates, see:
For more a complete discussion of the entire
mortgage process, from pre-qualification to
comparisons to selecting the right mortgage,
visit the following section of the site:
Get a Copy of Your Credit Report
IPlace.com, the largest supplier of credit reports
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get a copy of your report. You can get a single
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Sources of Credit Reports
This Month’s Tip: Understanding PMI (Private Mortgage Insurance)
One of the most frequently misunderstood aspects of mortgaging
a home, especially for first-time buyers, is Private Mortgage
Insurance (PMI). The most common misconception is that PMI
is a mortgage life insurance policy whereby the mortgage
would be paid off should the borrower die. It is not.
Instead, PMI is an insurance that most lenders require
of all borrowers who put less than 20% down. It’s purpose
is to protect the lender against losses should the
Virtually all conventional mortgages with less than a
20% downpayment will dictate the inclusion of PMI. FHA
mortgages, which are insured by the Federal Governement,
require a different type of insurance with different
coverages. The cost of PMI will depend on a number of
factors, including the insurance carrier and the size of the
loan, but monthly payments for the insurance will generally
fall into the $25 – $100 range for median priced homes.
What’s In It For Me?
When confronted with PMI for the first time, many buyers
will ask “If I’m paying the premium but it is the
lender who is protected, what’s in it for me?” Simply,
the ability to purchase a home with less than 20% down.
Lenders have found that those who put down less than
20% are far more likely to default than those who put
down more. With the protection of PMI, lenders are able
to make more loans (and more buyers are able to buy
homes) with downpayments as low as 5% or 10%. This is
especially important to first-time buyers, where liquid
cash for downpayments and closing costs is often tight.
Unlike the mortgage insurance on FHA loans (which remains
through the life of the loan) PMI is, under certain
circumstances, cancellable. A new law, the Homeowners
Protection Act of 1998, simplified this cancellation
process greatly. Where once it was an involved process
to get the PMI removed from the loan, the procedure is
now much more “owner-friendly”. With all qualifying
loans that originated afer July 29, 1999, a homeowner
has the right to request cancellation when the mortgage
balance is less than 80% of the orignal purchase
price or appraised value (whichever is less). In order
to request cancellation, the loan must be current with
no delinquencies in the last 1-2 years. In addition,
an appraisal of current value (at the homeowner’s cost)
may be required.
The Homeowners Protection Act also stipulates (in the case
of most loans) that when the balance reaches 78%,
cancellation is automatic. Again, the loan must be
current for the cancellation process to begin.
Tips on PMI
+ Obviously, your first goal should be a 20% downpayment
level since this achieves a number of goals. First, it
eliminates the cost of PMI entirely. Second, it lowers
your monthly payment (since you have financed less).
Third, it allows you to buy more house since the money
that would have been for PMI can now be for a higher
+ There are plans which allow you to avoid PMI by getting
an immediate 2nd mortgage when you purchase the home.
For example, you would get a first mortgage for 80% of
the purchase price (no PMI), a 2nd mortgage for 10% of
the purchase price and put 10% down in cash (commonly
known as an 80-10-10 mortgage). The benefit here is
obvious (you avoid PMI) but there are several potential
1) The 2nd mortgage will be at a rate higher than the
1st mortgage, eating up some of your payment savings.
2) The 2nd mortgage may have a variable rate, meaning
that your payment can increase.
3) The 2nd mortgage may have a balloon payment, meaning
that the new balance will become due and payable long
before the 1st mortgage is paid off.
Although at first glance PMI appears to benefit only
the lender (and paid for by you!) there actually is the
big advantage of the ability for a homebuyer to purchase
a home with a much smaller downpayment. Just be certain
to keep a close watch on your equity so that you can cancel
the PMI at the first possible opportunity.
As always, if you have suggestions for improving the
site, or topics you would like to see addressed in
this newsletter (or, if you have used the Home Buyer’s
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that they have found the Home Buyer’s Information Center a
helpful resource in their buying process.
Have a great month and good luck in your home buying process!
The Team at the Home Buyer’s Information Center