The Great Real Estate Mortgage Debate
Posted by Mark Martella on Wed, June 26, 2013 @ 10:15 AM
One of the great debates that is going on right now is whether or not we have seen the end of the housing crisis and whether markets have rebounded to the point where investing in real estate is a good investment for one’s future. The answers, in part, depend upon who you ask.
Generally, however, it appears that the statistics show an increase in sales and average sales prices in the current residential market. However, there is also an increase in the number of foreclosure filings and still a large shadow inventory of properties languishing in the foreclosure process.
Nevertheless, a key element in turning the real estate market around is the availability of mortgage loans. According to a recent article in the Business Day section of the New York Times entitled “Signs of Easier Money for Mortgages” on April 13, 2013, there is more money available to be lent. That is the good news. The bad news is that it appears that lenders in an effort to make more loans, and, therefore, make more money, are starting down the slippery slope that led to the last financial crises by allowing for piggyback loans.
A piggyback loan is where a borrower is allowed to borrow an 80% first mortgage and a 20% second mortgage for 100% financing. The real estate crisis occurred in part due to a downturn in the market which placed people upside down as a result of many of these piggyback loans. According to the article, lenders like US Bank and Wells Fargo are making these loans but, allegedly, they are not making them to just anyone but have higher criteria with regard to credit scores the overall condition of the local real estate market.
Another tool for obtaining a mortgage loan with less than 80% down is the purchase of mortgage insurance. First, I must clear up the misconception of many people who think that mortgage insurance protects them if they are unable to make their mortgage payments. Mortgage insurance is not for the benefit of the borrower but, rather, for the benefit of the lender to protect it from any losses for the difference between the 80% market value and the additional 20% difference.
The newer version of mortgage insurance as of June 1, 2013 makes the mortgage insurance monthly premium payment applicable for the life of the loan. In the past, you would only have to pay mortgage insurance until the mortgage amount was less than 78% of the original loan value. Once either you paid down the loan or the value of the property increased so that the loan’s equity ratio was less than 78%, you could submit an appraisal of the property to your insurer and have the premium requirement removed.
Now, under the new version, starting in June, the mortgage insurance will generally have to be paid for the life of the loan. Additionally, the mortgage insurance premium has an upfront fee of 1.75% of the loan amount and the annual fee went up from 1.25% to 1.35%. The increase in the mortgage insurance fees is offset by the low interest rates that are currently available. However, as time passes and interest rates climb, the increased mortgages insurance rates may affect some potential borrowers.
Only time will tell whether we have seen the worst of the housing crises pass and whether the housing recovery will continue to gain momentum. While it is encouraging that lenders are loosening their standards which became overly restrictive and stifled the housing market, I hope that caution will also be exercised by lenders in coming up with financial products so that we are not facing another crisis in 10 years.
The best advice I can share when applying for a mortgage loan is that just because a bank may be willing to lend you the money, it does not mean that you may be able to comfortably live with the mortgage payment. Therefore, the key to avoiding financial trouble down the road is coming up with a realistic budget that includes a portion for savings and unexpected expenditures that may come up in the future so that you are not forced to rely on credit cards and robbing Peter to pay Paul to make your mortgage payment.
Contact a Real Estate Attorney
If you have a situation as we described in this article and have questions or concerns, please don’t hesitate to contact us to answer your real estate legal questions.
Martella Law Firm
18501 Murdock Circle, Suite 304
Port Charlotte, FL 33948