It is not uncommon to speak to potential home buyers, and to discuss different financial strategies, including funding the “traditional” twenty-percent down payment, to avoid paying Private Mortgage Insurance (“PMI”). This week, as karma would have it, I had identical situations where I was contacted by clients who wanted to put down less than the required twenty-percent, but wanted to explore the “Non-PMI” loan alternatives that the were reading online and from friends.
One of these candidates already had a very aggressive offer from their local credit union where they were eligible for a Non-PMI loan through their “Doctors Mortgage Program.” They acknowledged that the rate was higher than prevailing mortgage rates, but they were told by friends that this was a great option for them. In the second instance, the client was doing extensive research online. and they saw many comments where people discussed this as a preferred way to “game the system,” and avoid PMI.
On the surface, when faced with the notion of paying an extra monthly fee or not, who wouldn’t choose the latter? Unfortunately, in more advanced conversations with both of these home buyers I quickly recognized that these No-PMI options would be a terrible idea and were clearly the wrong guidance for them. In both cases, the reason for the smaller down payment was because the home buyers were looking to preserve cash so that they could do needed renovations and improvements on the home before they moved in. Each determined that within three to six months the PMI would be eliminated through the increased value and extra equity.
Similarly, I had two identical instances where homeowners contacted me about potential refinance options. That notion is not unique in of itself, as anyone who is paying attention to the market realizes that interest rates are at historical levels that warrant such inquiries. What was comparable in these instances was that each owner was looking to cash out for specific projects and needs, that required the limited use of funds. In both cases the funds would be outstanding for less than 12-24 months.
They candidly told me that they were aggressively shopping around, and were looking for lowest rates and terms – again, something not unique in the marketplace. With the first scenario, I realized that the increase in the loan amount would put the loan balance above $510,400. Loans above this balance are putting into a different pricing “tier” and often warrant higher interest rates. The second scenario put the loan-to-value above 70% which also put the loan parameters into a different category, and yielded higher interest rates.
In both cases, because of my in-depth conversations with them, I was able to determine that a “piggy-back” loan option was most sensible. By doing two simultaneous mortgages, (a first mortgage, with a second home equity line of credit), they would get the best interest rate options and have the flexibility to use their “cash-out” loan proceeds more prudently via a line of credit. In both cases the benefits well outweighed some of the risks and concerns.
I must admit, I love being unique and offering a more advantageous option when conversations begin so “generic” and common. I am finding that as the mortgage business becomes more competitive and commoditized, it is common for applicants to fall into the trap of getting generic advice for their very individualized circumstances. Most people think that getting a mortgage is a “one size fits all” and they don’t even bother having a “financial” conversation with their mortgage representative. I understand that perhaps most “loan officers” aren’t able to offer such guidance and insights, but in an industry that seems “exactly the same,” shouldn’t you look for something completely unique and personalized? Shout out and a very happy belated birthday to Mordy Rothberg.
Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well as specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at [email protected].
