PMI Explained

PMI, or Private Mortgage Insurance, has been around for a while. But it used to be reserved for people with less-than-stellar credit ratings. In its early days, PMI was a mark of shame of sorts, the scarlet letter that home buyers carried with them and averted their eyes when discussing the topic.


WHO HAS PMI?

In recent years, PMI has become the norm rather than the exception. According to the National Association of Realtors's 2006 Profile of Home Buyers and Sellers, the typical first-time purchaser bought with just 2 percent down while replacement home purchasers bought with 16 percent down. While PMI is often associated with first-time buyers, the reality is that even home buyers who are 'trading up' into a larger or more expensive home are carrying PMI.


WHAT IS PMI?

As the term PMI gets bandied about with ever-increasing frequency, many potential home buyers might not feel comfortable asking about the particulars. Simply put, PMI is insurance for the lender, usually paid for by the home buyer, when the buyer has less than 20% equity in the home at the time of purchase.

So if you have one of those creative 80-20 loans, you've got PMI. If you did anything other than a conventional 20% or more down payment, you've most likely got PMI. Some home buyers sidestepped PMI, but the trade-off was to pay a higher interest rate.


HOW DO I GET RID OF PMI?

PMI used to be incredibly difficult to do away with. Borrowers were responsible for keeping track of their loan ratio, and then had to contact their lenders to have PMI removed. Buyers who did not keep track of the numbers continued to pay into PMI, even when they surpassed the investment requirement that would release them from the additional payment.

Loans secured after July 29, 1999 have added protection with automatic cancellation or termination of the PMI once the balance is below 80 percent of the original value. This is known as "Automatic Termination", and typically kicks in when you accrue 22% equity.

But your lender is certainly not keeping track of your home's natural appreciation. So if you are in an area that has seen strong appreciation over the past few years, or even if you have made improvements to your home, you might already be at or beyond the necessary threshold to cancel PMI.

David Porter points out that, in the case of "Borrower Requested Cancellation", home owners should be aware of the following restrictions:

May be requested once you pay down your mortgage to the point that it equals 80% of the original purchase price or appraised value of your home at the time loan was obtained, which ever is less.
No 30 day late payments on your mortgage in the last year.
No 60 day late payments on your mortgage in the last two years.
Your mortgage servicer may require an appraisal to evidence the current value.
Having a second mortgage will likely foul up your request.


PMI MYTH: My real estate taxes will increase if I have my home reappraised.

Many people wonder if having their lender reappraise their homes will trigger an increase in property taxes. The fact is, the A mortgage lender's professional appraisal of your home has absolutely nothing to do with your property tax assessment....Only the local tax assessor -- not a licensed appraiser hired by your mortgage lender -- can reassess your property.


As more and more people are faced with increased mortgage payments from adjustable rate mortgages, getting rid of PMI could prove to be an incredibly helpful tool for home owners.

The 2006 Real Estate Year in Review

The 2006 numbers have been tallied, and it turns out that it was a bit of a cool year. Overall, real estate prices continued to trend upward, but at a much slower rate than in previous years.

What will 2007 hold? Of course, real estate agents and brokers are nervous. They and the folks in the mortgage industry will be watching Fed rates closely in the coming year. The days of easy refinances and quick sales seem to be gone for now. But those professionals who evolve with this current market, rather than clinging to the 'good old days' of just a couple of years ago will continue to do just fine.

In trying to predict the 2007 real estate market, those in the real estate industry are doing some interesting dances. The National Association of Home Builders reverses themselves in two back-to-back articles. On January 15, 2007, they write the optimistic article "Eye On the Economy: Home Sales May Be Firming Up." Just a week later, they draft an article titled "Recent Reports to Fed Show More Cooling in Housing Markets."

The National Association of Realtors is covering itself in a similar fashion. On January 25, 2007, they lead with the article "Existing-Home Sales Ease, Supplies Tighten." On February 1, they write "Pending Home Sales Index Rises." One can't help but wonder if these conflicting reports are drafted with the idea that one set goes to home sellers and the other to home buyers, as the broker or agent sees fit.

	EXISTING HOME PRICES	PERCENT CHANGE	AVERAGE PRICE
2002	$166,200	7.6	$208,400
2003	$180,200	8.4	$225,000
2004	$195,200	8.3	$245,800
2005	$219,000	12.2	$267,400
2006	$222,000	1.4	$269,600

A Common Myth of Home Buying

Piggybacking off of my last post, Hiring Real Estate Agents, What's Your Method of Choice? I'd like to address a common misconception among home buyers.

Every couple of months, it seems, I have to talk a friend or family member out of doing this, so I thought I'd share this common myth with the rest of the world.

Home buyers often convince themselves that they will save money by choosing one of two options. They believe that if they A) represent themselves, or B) work with the selling agent, they will somehow save themselves 3% of the commission.

Here is the honest-to-God truth, from someone who does NOT work in the real estate industry: Nothing could be further from the truth.

The reality is, commission is set by a contract between the home seller and the agent whom the seller chooses to represent the home. The selling agent, then, determines how much of that they are willing to share with the "other side", the buyer's agent.

If the agreed-upon commission is, say 6%, a selling agent could very well choose to offer only 1% to the buyers' side. This is unlikely, as few buying agents would leap at the chance to sell a home for 1%. Conversely, if the agent needs add extra incentive to sell the home quickly, they could choose to offer 5% to the buyers' side. During the time I was involved in real estate marketing, I did see several 4% offers to the buyer's side in return for quick sales.

If there is no buying agent, the selling agent keeps the 6% commission to themselves, since that is the contract they have with the seller. A home buyer does not play a role in the contract between seller and seller's agent. And, again, that is where commission is set.

Home buyers are often convinced that a selling agent will reduce their side of the commission of there is no buyer's agent. This is highly unlikely. When it does happen, let me tell you why you should be extremely wary of these folks:

1. You are not adequately represented in the largest financial contract most of us will ever be involved with in our lifetimes. If you choose to allow the seller's agent to have "dual agency", where one agent represents both sides, how good of a deal do you think you're getting in contract negotiations? Particularly if the agent has agreed to do twice the work for half the pay, per your insistence?

2. An ethical agent who will reduce commission and allow you to represent yourself will wind up representing you anyway. Only rookie agents will make this mistake. And a rookie agent will have a hell of a time navigating the complex waters of implied dual agency.

An unethical agent will take advantage of you to the fullest, since he or she will have to explain each step of the process to you, thus creating a lot more work.

No matter how you feel about real estate agents (and I'll state right here that I've got plenty of mixed feelings myself), you need to be represented when you purchase a home.

I'm flummoxed when I hear otherwise rational human beings, people who realize that after a certain age you just hire professionals to do things, suddenly decide to forego a buyer's agent.

Unless you're willing to pick up another full-time job, you're saving yourself nothing. By that I mean that you must be prepared to see homes, navigate inspections, negotiate contracts, etc. and do it well enough to protect what is likely the largest investment in your 'portfolio'.

If you don't do it well enough, you can find yourself in a home in need of serious repairs, in a contract that exposes you to a world of liability, or any number of worst-case scenarios.

I don't know too many people who would drive without car insurance, no matter what the expense. Because the reality is that, if something goes wrong, it goes very wrong. And no amount of money saved compensates for that.

I hope this posting will clear up a widespread myth about home buying. I know a lot of people will be irritated to read this, but I hope that ultimately most people find it helpful.

Hiring Real Estate AgentsWhat's Your Method of Choice?

This is a topic that I'd like to pose to both consumers and real estate agents:

With literally millions of agents to choose from in America, and hundreds of thousands in major American cities, what is the most effective way to hire a real estate agent?

Personally, I'm one of those highly-strung researchers who spends ages of time fleshing out a topic before I move forward. But I know that the vast majority of consumers are not like this.

In fact, many of those consumers are my friends and family. And I watch as they hunt and peck their way through the buying process, going through multiple agents before they finally pair with one who suits them.

For consumers, I wonder, how do you choose an agent? I know many folks rely on referrals from friends and family. But, (in the realm of theory here) say my little brother is looking to buy his first condo....is it right to assume that the elderly lady who sold my parents their multi-million dollar golf course-fronted retirement villa is a good match for him?

So how do you filter through the thousands of options? How did you find your last agent, and if you had it to do all over again, what would you do differently?

For agents, I'd like to give you a forum here. What things do you wish clients would know, do, research, or ask when they're looking for an agent? I know you all would be just as happy as your customers if clients and agents were paired appropriately. How can we make this happen?

After all, you've probably had your share of bad clients. I'm also pretty sure you may have salivated as you saw someone in your office working with a client who is an 'okay' fit, but would be a perfect match to your expertise.

I'm really looking forward to hearing from readers on this topic. It will certainly answer a lot of questions for home buyers across the country.

The Changing Face of Homeowners Insurance

Two states to watch in 2007 will certainly be Mississippi and Florida. The real estate markets in these two states have traditionally withstood natural disasters such as hurricaines. But insurers are fleeing the disaster-prone areas, leaving homeowners, and states, with no safety net.

State Farm made a huge round of news stories when it announced that it would not write any new policies in Mississippi. At the heart of the issue is whether hurricane damage was caused by wind or water damage, as homeowners' policies do not cover against water damage.

Insurers in Florida are in the process of scaling back their wind policies. Now Florida's legislators are trying to keep both insurers and property owners in the state. "At the root of the trouble is that insuring against a major storm in much of South Florida has been deemed simply too risky to be affordable."

Mississippi's response has been to threaten to mandate insurance companies into writing policies in that state, which has drawn widespread criticism from homeowners in other states. Florida's plan, meanwhile, has been to promise billions of dollars of bailout monies for both parties.

Certainly, every state has its own unique propensity for natural disaster. From tornado damage in the Midwest to California's ubiquitous earthquakes, the nation is poised to watch the developments in Florida and Mississippi very closely.

Homestead Exemptions

Many homeowners have never heard the term "Homestead Exemption." There are three possible reasons for this. First, you live in a state that does not require an Exemption Declaration, such as Texas, meaning that your Homestead Exemption is automatic. Second, you might live in one of the small number of states that do not offer their residents the protection of a Homestead Exemption. Third, your real estate agent never told you to file one after you bought your home.

So what's the big deal?

In its broadest sense, a Homestead Exemption allows a homeowner to retain all or part of their home's value or acreage in the following circumstances:
Preventing the forced sale of a home to meet the demands of creditors;
Providing a surviving spouse with shelter;
Providing an exemption from property taxes.

The Homestead Exemption will NOT protect your home from a forced sale to cover mortgage debt or a mechanic's lien.

The terms of the Homestead Exemption, of course, vary widely from state to state. Florida and Texas are considered to have the most liberal Homestead Exemptions. Florida protects an unlimited value of a home, but limits that protection to a half-acre within a municipality. Rural properties in Florida are allowed much greater acreage. Texas also places no cap on value, and allows for a generous 10 acres within a municipality, 100 acres in a rural area, and 200 hundred acres for a family in a rural area.

Most states don't allow for such a broad application of Homestead Exemption. In those cases, if your home goes into a forced sale, a certain number of dollars or percentage of value will have to go to the homeowner, even if that reduces the amount of debt than can be paid back through the home sale. You are generally only allowed to have an exemption on one property, and it must be your primary residence.

Some states, counties, and even cities give their elderly, low-income, and disabled homeowners a property tax break via the Homestead Exemption. This can cap the dollar amount of property taxes, or allow for a certain dollar value (i.e. up to $75,000) to be non-taxable. This is especially helpful for those on a fixed income who may be living in an area undergoing tremendous growth or increase in property values.


Now for the necessary disclaimers: I am not a lawyer and do not work in real estate. This is the extent of what I know on this topic, from personal knowledge and culled from reference materials. Like all things in life, if you need a professional (such as a lawyer), by all means hire one and do not rely on this discussion forum for legal advice!!! I sincerely hope that readers will comment, expand, and expound on this topic.

More information on Homestead Exemptions can be found in the excellent Nolo Law series.

Hot Real Estate News, Feb. 15, 2007

Hot Real Estate News

February 15, 2007

The Wall Street Journal reports that 100% loans are losing favor with lenders. Typically referred to as an 80-20 loan, the second mortgage rounds out the loan amount to a full 100% for buyers without a down payment. Lenders are having a difficult time reselling these loans on the secondary market, and are wary of upcoming foreclosure rates from the already creative lending practices of the past several years.

'Across the board, everybody is ratcheting up'" the minimum credit score at which they will make particular loans" cites the Journal, further stating that "Borrowers have been rapidly falling behind on loans made in the past year or so."

What happens when you marry the concepts of hiring actors for open houses and providing virtual tours on YouTube? The Chicago Tribune has found it: Webisodes...a video soap opera of sorts where developers hope that home buyers will, literally, buy into the lifestyle they present:

Dougal and Anya are fictional characters. Their onscreen story is "Sex and the City" meets "Will & Grace." But there's another character in the mix, and it is the building.

The building is the Donovan, a soon-to-be-real high-rise in the hip Yaletown neighborhood in Vancouver. It's a major player in "Donovan Life," a professionally produced sitcom introduced online Wednesday.

Forbes pinpoints the "Best and Worst Housing Markets" in America, noting that incredibly expensive real estate markets such as Boston and San Diego have cooled slightly. Their prediction for the Gulf Coast looks brighter, as homes appreciated from 7-15% in post-Katrina cities.

According to Forbes, the strongest real estate markets in America right now are Seattle, El Paso, and Houston, reflecting the relocation trends that Americans have created in search of jobs and an affordable cost of living. Detriot, Miami, and Indianapolis are the loss-leaders at the moment.

Meanwhile, MSNBC reminds American home buyers that the grass is still greener on this side of the pond. Their article "77 sq. feet for $335,000? Welcome to London" describes an unfurnished basement closet with no heating or electricity on the market for an astonishing $4,340 a square foot.

Real estate appreciation in London's poshest districts has been incredible, with an average increase of over 22% in the past year. In places such as Kensington and Chelsea, homeowners have averaged a whopping 60% appreciation.

Ultra high-end property prices in London are the most expensive in the world, with some recent sales hitting $6,000 per square foot....Similar properties in New York can go for about $5,000 per square foot, while those in Hong Kong sell at around $4,000 per square foot.

Refuting "Facts" at RealtyTimes.com

It looks like we get to kick things off with a piece that proves the need for our website's very existence.

The well respected site Realtytimes.com posted an interesting article on its homepage today. Interesting, because if you try to follow the advice within, you'll wind up committing tax fraud.

Today, Diane Kennedy writes about the generous $250,000/$500,000 capital gains exclusion that homeowners can take on the sale of their homes. But in her second paragraph, she makes this assertion:

"The IRS allows you to have temporary absences from your home each year that can be up to 11.5 months! You can literally buy a home, live in it for 2-3 weeks per year for two years and take the entire tax-free gain exclusion."

My first reaction to reading this was "That's just wrong!" But, always one to admit that things change, and I could indeed be incorrect, I decided to research the facts before sharing them. I went to the IRS website, which helpfully reinforced what I thought I already knew.

Just to clarify, yes, you are entitled to take a $250,000 capital gains exclusion ($500,000 on joint returns) on the sale of your home. But, like everything else in life, it's not quite as simple as that. Straight from the IRS, here are the requirements you'll need to meet in order to keep from paying taxes on the first $250,000/$500,000 profit on your home's sale:

"To be eligible for an exclusion, your home must have been owned by you and used as your main home for a period of at least two years out of the five years prior to its sale or exchange. The required two years of ownership and use during the five–year period ending on the date of sale do not have to be continuous. You can meet the ownership and the use tests during different two year periods. However, both tests must be met during the five–year period ending on the date of the sale or exchange."

In other words, yes, the IRS does take into account that you may have more than one residence and is, for once, lenient in its application of "primary residence." But you must have lived in the home for a total of two years out of the previous five. Applying Ms. Kennedy's advice, that you could live in a home for a couple of weeks and take the exclusion after two years, will almost certainly get you audited.

There are exceptions to this two-out-of-five rule. "Unforseen circumstances" such as a health crisis, change of employment, or military duty. To explore those exceptions further, read the IRS's publication "Topic 523" for more information.

In the meantime, we've alerted Realty Times to their error, and will wait to see a correction posted.

Welcome to The RE Forum - The Real Estate Forum

The idea for this site came from the hundreds of hours I've spent in research and conversations with friends and family about real estate. The fact is, there are a lot of myths and urban legends out there about real estate. And we're here to provide solid facts for homeowners, home buyers, and home sellers. Heck, we'll even let real estate agents, brokers, and other industry folks play with us. Like Fair Housing, we don't discriminate--there's a lot to learn!

The idea behind "The RE Forum" is simple. We want to be a great source of information for folks at every tier of the real estate industry. Come here and tell others about your home buying or home selling experience. First-timer? Post questions for experienced home buyers and home sellers to comment on and answer.

Thinking about taking the for sale by owner (FSBO) route? Read what others are saying about buying and selling homes. Relocating? Come here to ask other RE Forum users for a referral to an agent or broker in your new hometown.

We have a lot of big plans for this site--some very interesting and innovative user tools that we hope you will find incredibly helpful as you navigate real estate markets. We encourage you to become an active member here (free, of course!) by posting your comments and questions, playing with the fun widgets we post, and letting us know what you think.

Welcome to The RE Forum - The Real Estate Forum.