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Anatomy of a Train Wreck
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<blockquote data-quote="The Other Side" data-source="post: 410350" data-attributes="member: 17969"><p><em>The Homeowner's Protection Act (HPA) of 1998 </em></p><p><strong>What Loans Are Covered?</strong></p><p>Generally, the HPA applies to residential mortgage transactions obtained on or after July 29, 1999, but it also has requirements for loans obtained before that date. <strong>This new law does not cover VA and FHA government-guaranteed loans. In addition, the new law has different requirements for loans classified as "high-risk." Although the HPA does not provide the standards for what constitutes a "high risk" loan, it permits Fannie Mae and Freddie Mac to issue guidance for mortgages that conform to secondary market loan limits.</strong> Fannie Mae and Freddie Mac are corporations chartered by Congress to create a continuous flow of funds to mortgage lenders in support of homeownership. As of January 1, 2000, mortgages in amounts of $252,700 or less are considered conforming loans. For non-conforming mortgages, the lender may designate mortgage loans as "high risk."</p><p> </p><p><strong>Ways to avoid PMI</strong></p><p><strong></strong>In today's market, there are some new ways to avoid mortgage insurance even when you don't have the standard 20 percent down payment.</p><p><strong>Pay more interest: </strong>Some lenders will waive the mortgage insurance requirement if the buyer accepts a higher interest rate on the mortgage loan. The rate increases generally range from .75 percent to 1 percent, depending on the down payment. The advantage is that mortgage interest is tax deductible. (Use the <a href="http://www.bankrate.com/brm/mortgage-calculator.asp" target="_blank"><u><span style="color: #0066cc">mortgage calculator </span></u></a>to see what your payment would be.)</p><p><strong>Using an "80-10-10" loan:</strong> This program involves two loans and a 10 percent down payment. The 90 percent loan is financed with a first mortgage equal to 80 percent of the sale price, and a second mortgage for the remaining 10 percent of the sale price. The second mortgage has a higher interest rate but since it applies to only 10 percent of the total loan, the monthly payments on the two mortgages are still lower than paying one mortgage with mortgage insurance. Plus, again, there is the advantage of mortgage interest being tax deductible.</p><p><strong>Example:</strong> If we compare the purchase of a $100,000 home under the "80-10-10" plan with a standard fixed mortgage including PMI, we find that the former is $17.45 cheaper each month.</p><p>Here's how it works. Under the "80-10-10" plan, the 10 percent down payment on a $100,000 house is $10,000. The first mortgage is $80,000 at 7.50 percent, which comes to a monthly payment of $559. The second mortgage for $10,000 has a 9.50 percent interest rate, making a monthly payment of $84. Total monthly payments of the two loans: $643.</p><p>With a $10,000 down payment, one mortgage of $90,000 at 7.50 percent has a monthly payment of $629, plus PMI of $31.45, making a total payment of $660.45.</p><p>***************** </p><p> </p><p>Many of the loans in default did not carry the PMI insurance requirement because of the structuring of the loans. Creative loan structure is just one element in the collapse of the home market.</p></blockquote><p></p>
[QUOTE="The Other Side, post: 410350, member: 17969"] [I]The Homeowner's Protection Act (HPA) of 1998 [/I] [B]What Loans Are Covered?[/B] Generally, the HPA applies to residential mortgage transactions obtained on or after July 29, 1999, but it also has requirements for loans obtained before that date. [B]This new law does not cover VA and FHA government-guaranteed loans. In addition, the new law has different requirements for loans classified as "high-risk." Although the HPA does not provide the standards for what constitutes a "high risk" loan, it permits Fannie Mae and Freddie Mac to issue guidance for mortgages that conform to secondary market loan limits.[/B] Fannie Mae and Freddie Mac are corporations chartered by Congress to create a continuous flow of funds to mortgage lenders in support of homeownership. As of January 1, 2000, mortgages in amounts of $252,700 or less are considered conforming loans. For non-conforming mortgages, the lender may designate mortgage loans as "high risk." [B]Ways to avoid PMI [/B]In today's market, there are some new ways to avoid mortgage insurance even when you don't have the standard 20 percent down payment. [B]Pay more interest: [/B]Some lenders will waive the mortgage insurance requirement if the buyer accepts a higher interest rate on the mortgage loan. The rate increases generally range from .75 percent to 1 percent, depending on the down payment. The advantage is that mortgage interest is tax deductible. (Use the [URL="http://www.bankrate.com/brm/mortgage-calculator.asp"][U][COLOR=#0066cc]mortgage calculator [/COLOR][/U][/URL]to see what your payment would be.) [B]Using an "80-10-10" loan:[/B] This program involves two loans and a 10 percent down payment. The 90 percent loan is financed with a first mortgage equal to 80 percent of the sale price, and a second mortgage for the remaining 10 percent of the sale price. The second mortgage has a higher interest rate but since it applies to only 10 percent of the total loan, the monthly payments on the two mortgages are still lower than paying one mortgage with mortgage insurance. Plus, again, there is the advantage of mortgage interest being tax deductible. [B]Example:[/B] If we compare the purchase of a $100,000 home under the "80-10-10" plan with a standard fixed mortgage including PMI, we find that the former is $17.45 cheaper each month. Here's how it works. Under the "80-10-10" plan, the 10 percent down payment on a $100,000 house is $10,000. The first mortgage is $80,000 at 7.50 percent, which comes to a monthly payment of $559. The second mortgage for $10,000 has a 9.50 percent interest rate, making a monthly payment of $84. Total monthly payments of the two loans: $643. With a $10,000 down payment, one mortgage of $90,000 at 7.50 percent has a monthly payment of $629, plus PMI of $31.45, making a total payment of $660.45. ***************** Many of the loans in default did not carry the PMI insurance requirement because of the structuring of the loans. Creative loan structure is just one element in the collapse of the home market. [/QUOTE]
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