Back in early October, I wrote a brief story of a young man (whom I have dubbed as “Truliaboy”) who purchased a nice home via a short sale at 15% under the then current market value. It is a beautiful home on over an acre of land purchased for less than $300,000. With his permission I am posting this follow up story for the benefit of those who purchased “awesome deals” with little down, to show how one person was able to get rid of the Mortgage Insurance Premium via a refinance, and save a lot of money on interest as well, less than one year after his original purchase.
At time of purchase, the Annual Percentage Rate (including up front loan costs) on Truliaboy’s TIL (Federal Truth-In-Lending Disclosure Statement) was 5.336%. The recent refinance that closed last week carries an APR of 4.491%…a considerable savings. On the original 30 year loan, the Total Finance Charges for the life of the loan show as $260,169.12. On the recent refinance the new charges for the life of the loan show as $221,385.09.
Total Savings = $38,784.03.
Back to the issue of the Mortgage Insurance Premium. The Mortgage Insurance Premium on the original loan was $109 a month, and the loan amortization on the TIL included this amount for the first 9 years plus 5 months on a slightly decreasing scale. $109 a month in the first year and down to $93 a month in the final payments. By eliminating the monthly mortgage insurance premium, Truliaboy saved approximately $11,300 in monthly mortgage insurance premium payments.
His original monthly payment, including MIP, was $1,536.60. His new payment is $1,363.05. Total savings in his current monthly payment $173.55 per month.
1) If you purchased a house in the last year or two at significant savings by buying a short sale or a bank owned home with less than 20% down, you should look into the possibility of getting rid of your Mortgage Insurance Premium by refinancing your loan IF the current value is likely 20% less than your new Total Mortgage Amount.
2) Be sure to re-evaluate the Total Savings vs. the Total Cost of the New Loan AFTER the new appraisal comes in. It could cost you a few hundred dollars in “wasted” appraisal fee, but you need to be ready to pull the plug IF the new appraisal does not come in at an amount that will equal a new Loan to Value that is more favorable than your original loan. Make sure the monthly savings via reduced or eliminated Mortgage Insurance Premium (and interest savings if applicable) justify the cost of the refinance. Check your “comps” in advance as much as possible, to help determine the odds of a successful outcome.
3) Be sure to make as many LOW COST improvements to the home (if you have not already done so) to help insure a successful new appraised value. Clean and stage your home for the appraiser’s visit the same as you would for a potential homebuyer.
Part of the success lies in the fact that Truliaboy made some improvements to the home in the short time that he has owned it. The cost of the home’s improvements since time of purchase was approximately $10,000 to $12,000 BUT Truliaboy used his $8,000 First Time Homebuyer Tax Credit to make a huge dent in the cost of those improvements.
That is an AWESOME example of how to spend your $8,000 Tax Credit wisely, and parlay it into additional savings over the time you will be living in the home, by using the improved value to get rid of the PMI / MIP!!!
As in the original story, Truliaboy gets all of the credit from me for a job well done…AGAIN! Though Truliaboy continues to credit St. Joseph for his HUGE success story, I think it was a combination of factors, not the least of which was Truliaboy’s efforts that caused St. Joseph to bless him with this successful outcome.
If you were wise and lucky enough to purchase a home at considerably less than the appraised value at time of purchase in the last couple of “sub-prime crisis” years, and you bought the home with less than 20% down payment, be sure to look into the possibility of turning that “instant equity” into REAL today savings by eliminating the Mortgage Insurance Premium via a refinance.
On our last house we were able to get rid of our PMI via a request for appraisal and submittal of paperwork to our bank. At that time it was WAMU. It only took 17 months from 2003 to late 2004, after putting 3.5% down toward purchase to achieve this. We already had a great interest rate at the time so no need to refinance.
But, we watched closely as the months passed. When we thought it possible the appraised value of our house could achieve the LTV of 80/20 we ordered the bank to do an appraisal. Voila! No more PMI. Reduction of payments vs. appraisal cost was only a 2-1/2 month return.
Thank you for sharing a feel good story it is nice to see that something positive can still be achieved within home ownership
Exactly what I’ve been saying in my Google “Knol” (below) about using your SmartDealing savings to improve the property you’ve bought. JG
http://knol.google.com/k/jerry-gropp-architect-aia/updating-your-mcm-bargain/246qxuxd260sm/168#
David S,
Thank you for sharing your story. In the 2nd link in the post above I explain that at time of purchase the mortgage insurance is based on the lesser of the appraised value and the purchase price. Elimination of the insurance was mostly possible in less than a year’s time from purchase, because he bought the house for roughly 15% less than the value at time of purchase.
I have two other clients who bought in 2009 who I think may be able to do this. One of them bought the house for 20% less than appraised value, so I’m pretty sure they can both lower their interest rate and get rid of their mortgage insurance. The other might not be able to get rid of the PMI, but the interest rate spread makes it worth a try.
The key is LOW COST on the refinance. Yours was AWESOME, but lenders are a lot more cautious these days about removing their insurance protection than they were back in 2003 and 2004.
A new lender has more incentive to make this work than the current lender, and many homes are not an easy appraisal. This particular home is a stand alone home (not in a development) on a large lot, which gives the lender’s appraiser a lot of leeway in choosing comps. It clearly could have gone either way…one of the reasons the owner credits St. Joseph for his success.
As to your last sentence, “Thank you for sharing a feel good story it is nice to see that something positive can still be achieved within home ownership.” all of my client’s successes last year were primarily due to the bad fortune of someone else. Truliaboy was able to buy this house for less because of the misfortune of the owner before him.
I think that comes under the category of “every cloud has a silver lining”.
Jerry,
Truliaboy did modest improvements. He painted the wood trim, shutters and front door that pretty burgundy color (it was a faded colonial blue). He put in new kitchen cabinets, and appliances and did all of the work himself with the help of friends and family. He also made some improvements in the 2nd floor hall bath and master suite. The $10,000 to $12,000 of cost was mostly material with his own “sweat equity”. $2,000 to $4,000 were his funds and the remaining materials were bought with his $8,000 1st Time Homebuyer Tax Credit.
He did talk about an addition in the future on the side, but the house is more suited to a 10 foot or so bump out on the back. That would expand the current galley kitchen to a full size eat in kitchen, give the dining room a needed expansion and add 800 sf overall expanding both the master bedroom and the master bath. The home is about 1,700 square feet now and 40 feet across. So a 2-story 10′ bump out would expand it to a “perfect” size of 2,500 sf.
The expense of a remodel is generally less risk on a true 2-story home than on a Mid-Century Modern home. Having three or four bedrooms “up” is rare in an MCM, and clearly the preference of today’s buyer. I would be leery of putting too much money into an obsolete home style, unless it was in an awesome location.
Ardell- We’ve had this discussion before.- and it’s worth having again. It has to be looked at with an expert artistic eye- not just a cold calculating one predjudiced against an allegedly “obsolete” style..
When I evaluate a home (hopefully before the sale goes through), I consider what kind of a home we’ll wind up with, how it might suit the prospective owners and how they’ll live in it- (or hope to). JG
Jerry,
🙂
Jerry,
I’m working on stats for another post and happened on some relevant numbers that support my caution about costly improvements to homes that are not true 2-story homes. As you can see from the photo, Truliaboy’s home IS a true 2 story home.
I’m looking at 98052 sales year to date 2010. 85% of all homes sold for more than the median price were 2-story homes. So trying to expand the value of a home that is not a 2-story home above the median price point, is not recommended.
A- As to your above: “trying to expand the value of a home that is not a 2-story home above the median price point, is not recommended.”- I guess Patty and I should be (but aren’t) in deep, deep trouble with our one-story Mercer Island Mid-Century Modern (see my WebSite). There are so many creative ways to make a one-story home more valuable- to the owners. J-
Cost of refinance? and does mortgage insurance give him an argument against a deficiency judgement in the case of default? Lastly what would his amortization schedule look like if he simply applied the $8K to the principle balance?
David L.,
The break even on the cost is 17 months. Costs were about $3,000 and monthly savings $175. I don’t think there is a deficiency judgment on a 1st mortgage of a principal residence in WA, David, but check that with an attorney. I doubt that will happen since it is unlikely he will ever be laid off as he works for a family owned business.
The savings if he applied the $8,000 to his mortgage would only be $40 a month vs the $175 a month he saved doing the refi. Plus he enjoys the house more with the improvements. So all around, I don’t think he could have made a better decision or used the tax credit more wisely.
$40 a month savings isn’t an answer, what does the amortization schedule look like if the owner pays principle in the first three years?
The second thing is if the person decides to walk from the property because it goes down so much in value that it isn’t worth keeping, would mortgage insurance cover the loss to the lender?
David,
Mortgage Insurance only covers the top 20% or some increment thereof…not the entire loan. I do believe in this particular case that the lender is better served by an improved asset with that $8,000 tax credit than a mortgage of $8,000 less, for many, many reasons.
The most important reason is that since the $8,000 is material cost only, the value of the property is increased by much more than that $8,000. Given the property is the lender’s collateral, and there is only one first mortgage at 80% of current value now, the actions of this homeowner serve the lender’s overall purpose.
As to what if the owner walked away…not much logic in that at all. You can see the house there behind the dog. You can see in the post that the current mortgage payment on the new loan is $1,363.05. I’m pretty sure the house would rent for more than the mortgage payment, so there would be no need to walk away from it. The rent would cover the owner’s cost if they did have to leave the house and rent it out. The value is only part of the equation. Most people would rent the house out if they could cover their monthly cost with the rent…most can not. This owner could, so your concern is pretty much moot.
As to $40 not being an answer…I have no clue what you mean be that. 8,000 financed over 30 years creates a payment of $40 a month…thus a mortgage of $8,000 less would save that same $40 a month vs. the $175 that this owner saved. Without spending that $8,000 he may not have been able to get rid of the $109 of mortgage insurance and without doing the refinance he would not have saved th4e additional $65 to $70 in monthly interest. Makes no sense to save $40 vs. $175 total. None at all. Not from where I’m sitting anyway.
What’s your beef? I think the boy did a fabulous job, both at time of purchase and his recent refinance less than one year later. Why are you not happy, David L.? Do you ever get happy at someone else’s success? You are such a curmudgeon for a young man 🙂
I think people, at this point in our economic cycle, should be concerned about getting a property paid off while they can.
I’m very concerned for Trulia boy and his path to creating wealth for himself, and hopefully his family.
There are way too many issues to address in your comment that cause my concern.
Honestly it’s simple math, but I do agree the lender is very happy at this point. The lender found some one to negotiate the asset price, put money into the property, then paid to refinance.
My comment is just a caution, but you are right, this past year has me gravely concerned about the price of Real Estate.
It’s a good day when someone can buy a house and have a mortgage payment that is less than the cost of renting that same house, David. There’s no downside to this story…though you seem to want there to be one. The lender didn’t get paid again to do the refinance…it wasn’t the same lender…and it wasn’t the lender’s idea. Truliaboy wanted to get rid of his PMI payments of over $100 a month. The $175 a month savings includes the cost of the refinance, which was financed. So there really is no way to see this as a bad thing, David, no matter how hard you try.
As to your concern about the price of real estate…getting a big house like that on an acre of land for under $300,000 is a good thing, anyway you slice it. There’s enough extra flat land there to build a 2nd house for his children in 20 years 🙂