Long-term mortgage interest rates increased Monday, and the benchmark 10-year Treasury bond yield was up at 4.64 percent.

The 30-year fixed-rate average increased to 5.67 percent, and the 15-year fixed-rate climbed to 5.25 percent. The 1-year adjustable decreased slightly to 3.87 percent.

The 30-year Treasury bond yield increased to 4.89 percent.

Rates are current as of 7:15 p.m. Eastern Standard Time.

Mortgage rate figures are according to Bankrate.com, which publishes nightly averages based on its survey of 4,000 banks in 50 states. Points on these mortgages range from zero to 3.5.

In other economic news, the Dow Jones Industrial Average was up 42.78, or 0.41 percent, finishing at 10,485.65. The Nasdaq was up 1.46 points, or 0.07 percent, closing at 1,992.52.

Two major mortgage insurers are worried about potential speculative excesses in a growing number of U.S. real estate markets. One of them, PMI Mortgage Insurance Corp., is now quietly taking steps to rein in overly-exuberant real estate buyers who are betting on the continuation of high appreciation rates with highly-leveraged loans.

PMI recently sent new underwriting rules to its lender network, tightening up on the number of mortgages – and dollar risk exposure – loan applicants are permitted to present to the insurer. Individual loan applicants no longer will be permitted to represent greater than $350,000 worth of total loss exposure to PMI, nor to have more than four PMI-insured low-downpayment loans.

A spokeswoman for PMI, Beth Haiken, confirmed that “we’re seeing an increase in investor loans,” especially multiple, high-leverage purchases in markets where prices have increased at double-digit rates recently. PMI and other insurers stand to lose big bucks in those markets if home values begin to fall, forcing speculation-driven investors into negative cash-flow positions on properties they’d planned to hold for short periods, then flip for hefty profits.

MGIC Mortgage Insurance Corp, another large underwriter, also is concerned by anecdotal evidence of highly-leveraged purchases of multiple units in some markets. MGIC’s vice president for credit policy, David Greco, said “we are watching a number of markets closely” for signs of speculative fever.

PMI monitors the 50 largest metropolitan areas with what it calls its “Risk Index.” The index evaluates home price movements, household incomes, employment growth, and other factors to rank markets’ relative probabilities of price deflation in the months ahead. In its current ranking, metropolitan Boston and San Jose top the list with better than a 50-50 chance – 53 percent probability – of home price declines in the next 24 months. San Francisco (48 percent chance), San Diego (43 percent), Providence, RI (40 percent), Sacramento (37 percent), New York and Los Angeles (36 percent), Denver (22 percent) and Miami-Ft.Lauderdale (18 percent) round out the high risk list. The national probability of price declines is 16 percent, according to PMI.

Late last week, NAR jumped into the issue with a warning that “speculative real estate is risky business.” However, NAR president Al Mansell, CEO of Coldwell Banker Residential Brokerage of Salt Lake City, suggested that concerns over the prevalence of speculation-driven purchases and price declines may be overblown.

Mansell said that although a recent NAR study found that 23 percent of all home purchases in 2004 went for non-owner-occupant investments, there is little statistical evidence that large numbers of buyers are flipping their properties – selling after short holding periods to reap profits. With only three percent of all home buyers selling within a year of purchase, said Mansell, real estate clearly “isn’t the sort of quick-in, quick out investment” that would fit the stock market definition of speculation.

“It’s true that some people have made fast profits (buying and selling houses) but it’s not to be expected,” said Mansell. “In fact, it can be risky, and property buyers need to be aware of the facts before they think about jumping in.”

RISMEDIA, March 23 – The Federal Reserve Tuesday raised interest rates again, boosting the federal funds rate by a quarter percentage point to 2.75%.

While the mortgage markets already increased their rates anticipating the Fed action, similar increases throughout the year could impact real estate sales.

“We see the Federal Reserve continuing to raise rates for the next five meetings,” says Lawrence Yun, senior economist for the National Association of Realtors. “The cycle … will slowly impact the mortgage rates.”

Yun says that the 30-year fixed mortgage – now 6 percent (average) – will be 6.7 percent by year’s end.

Yun is predicting that residential sales will decline 3 percent for 2005 as a whole. This comes off of four record years.

There were also be a slowing in price growth. Price appreciation in 2004 was 9 percent. It will be between 5 and 5.5 percent in 2005, according to Yun.

Amy Crews Cutts, deputy chief economist for Freddie Mac, said house price appreciation for existing houses was 10.7 percent in 2004, but will be 8 percent in 2005.

“That’s still in pretty darn healthy territory,” Cutts says.

But she also urged consumers to pay close attention to their ability to make mortgage payments in the future.

“Ask lots of questions of everyone involved in the transaction,” she urges buyers. “Ask before you sign.”

Lynn Reaser, chief economist of the Investment Strategies Group, at the Bank of America, said that the Fed indicated that rate increases are likely to continue to be “measured” or gradual but that inflation is becoming a greater concern to them.

Policymakers perceive economic growth as solid, including a gradual improvement in the labor market. They also see long-term inflationary expectations as well contained and have seen little feed-through of rising energy costs into underlying inflation.

Nevertheless, they pointed to a building of inflationary pressures (presumably including increasing commodity costs, a weaker dollar, and slowing productivity growth) together with signs that more firms are exercising pricing power.

Long-term mortgage interest rates rose on Tuesday, and the benchmark 10-year Treasury bond yield jumped to 4.63 percent.

The 30-year fixed-rate average climbed to 5.875 percent, and the 15-year fixed-rate increased slightly to 5.375 percent.

The 30-year Treasury bond yield climbed to 4.91 percent.

Rates are current as of 7:15 p.m. Eastern Standard Time.

Mortgage rate figures are according to Bankrate.com, which publishes nightly averages based on its survey of 4,000 banks in 50 states. Points on these mortgages range from zero to 3.5.

In other economic news, the Dow Jones Industrial Average was down 94.88 points, or 0.9 percent, finishing at 10,470.51. The Nasdaq was down 18.17 points, or 0.91 percent, closing at 1,989.34.

Stock and bond figures are current as of 7:30 p.m. Eastern Standard Time

Housing and Urban Development Secretary Alphonso Jackson today unveiled this year’s “SuperNOFA,” a notice that makes available $2.26 billion in funding through 53 grant opportunities. The funding will provide assistance to the homeless, affordable housing and community development through states, local governments and nonprofit grassroots organizations that house and serve lower-income families.

This year, HUD continues to place a premium on funding local communities and organizations that are working toward removing excessive and burdensome regulations that restrict the development of affordable housing at the local level. Last month, HUD released a report entitled “Why Not in Our Community?” which found many working families are forced to commute long distances or live in substandard or overcrowded housing because excessive regulations are artificially driving up the cost of housing. To help reverse this trend, HUD will award priority points to certain applicants in communities that can demonstrate successful efforts to reduce regulatory barriers that prevent many families from living in the communities where they work.

HUD’s fiscal year 2005 Notice of Funding Availability aims to reduce the paperwork burden on grant applicants by requiring all applicants to submit their funding requests electronically through www.grants.gov. Those applying for funding through HUD’s Continuum of Care homeless assistance programs will still submit paper applications.

The grant opportunities announced today are in addition to the $25.3 billion that HUD allocates to state and local communities, public housing agencies, and Native-American Tribes in the form of block grants, housing choice vouchers and other formula-based funding.

HUD is a federal agency that implements housing policy.

The median price of an existing home in California in February increased 20.4 percent and sales increased 3.2 percent compared with the same period a year ago, the California Association of Realtors reported today.

“February typically accounts for the smallest monthly share of annual sales in any given year, so we expected to see a slight dip compared to January,” said association President Jim Hamilton. “Year-to-year, the median price continued its upward climb, increasing 20.4 percent compared to February 2004. While the number of homes available for sale has improved, the short supply of homes on the market contributed to price appreciation.”

Closed escrow sales of existing, single-family detached homes in California totaled 608,170 in February at a seasonally adjusted annualized rate, according to information collected by association from more than 90 local Realtor associations statewide. Statewide home resale activity increased 3.2 percent from the 589,220 sales pace recorded in February 2004.

The statewide sales figure represents what the total number of homes sold during 2005 would be if sales maintained the February pace throughout the year. It is adjusted to account for seasonal factors that typically influence home sales.

The median price of an existing, single-family detached home in California during February 2005 was $471,620, a 20.4 percent increase over the revised $391,550 median for February 2004, association reported. The February 2005 median price decreased 2.9 percent compared with January’s $485,700 median price.

“While mortgage interest rates remain low by historical standards, upper-end markets may soften as affordability concerns impact households trying to stretch their purchasing power with adjustable rate loans,” said association Vice President and Chief Economist Leslie Appleton-Young. “Job growth in California in 2004 was stronger than originally projected, and a strengthening job market this year should have a positive impact on household incomes and housing market activity.”

The association’s latest housing statistics also show:

The Unsold Inventory Index for existing, single-family detached homes in February 2005 was 3.9 months, compared with 1.8 months (revised) for the same period a year ago. The index indicates the number of months needed to deplete the supply of homes on the market at the current sales rate.

Thirty-year fixed mortgage interest rates averaged 5.63 percent during February 2005, compared with 5.64 percent in February 2004, according to Freddie Mac. Adjustable mortgage interest rates averaged 4.16 percent in February 2005 compared with 3.55 percent in February 2004.

The median number of days it took to sell a single-family home was 40 days in February 2005, compared with 26 days (revised) for the same period a year ago.

Regional sales data are not adjusted to account for seasonal factors that can influence home sales. The MLS median price and sales data for detached homes are generated from a survey of more than 90 Realtor associations throughout the state. MLS median price and sales data for condominiums are based on a survey of more than 60 associations. The median price for both detached homes and condominiums represents closed escrow sales.

In a separate report covering more localized statistics generated by association and DataQuick Information Systems, 96.6 percent or 371 of 384 cities and communities showed an increase in their respective median home prices from a year ago. DataQuick statistics are based on county records data rather than MLS information. DataQuick Information Systems is a subsidiary of Vancouver-based MacDonald Dettwiler and Associates. (The top 10 lists are generated for incorporated cities with a minimum of 30 recorded sales in the month.)

The association notes that large changes in local median home prices typically indicate both local home price appreciation, and often, large shifts in the composition of housing market activity. Some of the variations in median home prices may be exaggerated due to compositional changes in housing demand. The DataQuick tables listing median home prices in California cities and counties are accessible online at http://www.car.org/index.php?id=MzQ3OTA=.

Statewide, the 10 cities and communities with the highest median home prices in California during February 2005 were: Los Altos, $1,400,000; Burlingame, $1,400,000; Newport Beach, $1,285,000; Santa Barbara, $996,500; Mill Valley, $932,000; Danville, $875,000; Menlo Park, $841,500; Cupertino, $840,000; Rancho Palos Verdes, $825,000; Los Gatos, $787,500; Mountain View, $750,500.

Statewide, the 10 cities and communities with the greatest median home price increases in February 2005 compared with the same period a year ago were: Adelanto, 81.8 percent; Rohnert Park, 77 percent; Tehachapi, 70.1 percent; West Sacramento, 69.7 percent; Hesperia, 67.4 percent; Twentynine Palms, 64.2 percent; Union City, 63.8 percent; Menlo Park, 60 percent; Norco, 55.7 percent; and San Bernardino, 54.5 percent.

In a widely expected move, the U.S. Federal Reserve today decided to raise its target for the federal funds rate to 2.75 percent, saying that pressures on inflation have picked up in recent months.

Federal Reserve Chairman Alan Greenspan and other policymakers raised the federal funds rate by 25 basis points, to 2.75 percent. Analysts had almost unanimously predicted the decision.

In a statement announcing the action, the Fed said policymakers continue to believe they can raise rates in a “measured” fashion, as they have said for nearly a year. But Fed expressed concern about inflation, saying that “pressures on inflation have picked up in recent months and pricing power is more evident.”

Greenspan and 12 colleagues on the policy-making Federal Open Market Committee voted for the decision.

“The Committee believes that, even after this action, the stance of monetary policy remains accommodative and, coupled with robust underlying growth in productivity, is providing ongoing support to economic activity,” the Fed’s statement said.

“Output evidently continues to grow at a solid pace despite the rise in energy prices, and labor market conditions continue to improve gradually,” the Fed noted.

Also, the statement said, “The Committee perceives that, with appropriate monetary policy action, the upside and downside risks to the attainment of both sustainable growth and price stability should be kept roughly equal”

As mortgage rates jumped this week, borrowers got nervous and they applied in greater numbers for adjustable-rate loans.

The benchmark 30-year fixed-rate mortgage rose 13 basis points to 6.00 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week’s survey had an average total of 0.30 discount and origination points. One year ago, the mortgage index reached its lowest point of 2004, at 5.41 percent.

The benchmark 15-year fixed-rate mortgage rose 15 basis points to 5.56 percent. The benchmark 5/1 adjustable-rate mortgage rose 11 points to 5.41 percent.

The 30-year rate had been under 6 percent since the first week of August. As the 30-year rate rose toward 6 percent this week, borrowers noticed.

“More people watch the rates than they do their favorite baseball teams,” says Bob Moulton, president of Americana Mortgage, a brokerage in New York. That goes for clients who watch the financial markets for a living as well as neophytes, he says: “Between the different media outlets, whether it’s print or radio or Internet or TV, there’s information flowing.”

One excellent source of such information is Mortgage Matters, Bankrate’s mortgage weblog.

Moulton says his phone hasn’t been ringing this much since early last summer, when rates last went on a sustained rise. “Volatility,” he says, “seems to create urgency.”

A lot of people are inquiring about extended rate locks because they want to wait and move after the school year ends. They need to lock for 90 to 120 days. The fee to lock the rate that long varies from about one-half of 1 percent of the loan amount to 1 percent of the loan amount, depending on the length of the lock. In lender’s parlance, that’s a fee of half a point to a point. “People feel that’s money well-spent, because if rates go higher, they could recoup that money in a couple of years,” Moulton says.

Borrowers have responded to higher rates by embracing ARMs. According to the Mortgage Bankers Association, adjustables constituted 32.4 percent of mortgage applications last week, compared to 30.5 percent the previous week. The ARM share hasn’t been that high since Santa’s elves were working overtime.

Borrowers are going to ARMs for a number of reasons, says Ed Powell, chief consumer officer for LendingTree.com. For some people, low-rate ARMs offer the only possibility for buying the expensive houses that they want. And a lot of borrowers buy homes knowing that they will move out (and, they hope, up) within a few years.

“If I want to buy a home and I can’t afford it on a 30-year fixed, I’ll get an adjustable rate – and I know I’m not going to be there more than three or five years,” goes the reasoning, according to Powell.

As for why rates rose in the first place, Powell points out that the economic indicators (retail sales, housing starts, employment) have shown relative strength. That means inflation could resume.

“The Federal Reserve has been saying they’re going to be completely on the edge of any inflation numbers, and they’re going to be hawkish about raising the federal funds rate over the remainder of the year,” Powell says, so he’s not concerned about runaway prices. But as the Fed raises short-term rates this year, ARM rates could continue to rise.

Mind-boggling identity theft statistics have nervous consumers looking for protection, and financial institutions scrambling for ways to provide it. But not all protection plans are created equal, and some consumer watchdogs say you should save your money.

The Federal Trade Commission says there were nearly 10 million identity theft victims in the United States in 2002. The losses cost businesses and financial institutions $48 billion and individual victims paid $5 billion in out-of-pocket expenses to correct the damage and prove they were victims, not culprits.

Most of the identity theft plans being offered by a growing number of financial institutions will reimburse customers for out-of-pocket expenses up to a certain dollar amount and help them through the process of contacting creditors, writing affidavits and filing reports.

Some companies, such as Washington Mutual, offer customers a basic plan for free and a souped-up version for a monthly fee. Spokeswoman Mary Kelley says company research showed that most customers were “extremely concerned” about identity theft

“We asked if they’d be interested in free ID theft services and a large majority said yes. But there was a smaller but significant number that said they’d be willing to pay for additional benefits.”

Washington Mutual’s free plan is offered to all customers who have a deposit account, but they must sign up. Included in the package is toll-free access to the bank’s Identity Theft Resource Center if the customer becomes a victim of identity theft, free access to credit education specialists and $5,000 in insurance (no deductible) to offset recovery costs, including legal fees and lost wages.

The bank’s paid plan costs $10 per month. It increases the insurance to $15,000 (no deductible), gives customers a copy of their credit report with information compiled from the three main credit-monitoring bureaus, monitors the customer’s credit files at the three bureaus five days a week and notifies the customer daily of any changes.

Pittsburgh-based PNC Bank also offers two plans. One is free to customers who have multiple accounts with the bank; the second, called True Credit, is available to customers for $3.65 per month. Both plans provide insurance to cover expenses associated with identity theft, but there are deductibles. True Credit offers credit monitoring, but with only one of the bureaus.

“It’s been very well received,” says Laila Batz-Krause, executive vice president. “It covers the individual wherever the identity theft occurs. If I have an identity theft involving the motor vehicle department, this will cover my costs. It isn’t just about our account – we have a lot of safeguards – it protects customers anywhere, which is where we think (identity theft) is more likely to happen.”

Officials at National City, headquartered in Cleveland, are reviewing identity theft insurance plans and hope to offer a program to customers by the end of the year.

“Identity theft insurance isn’t the only thing we’re looking for,” says Darla Mathy, a senior vice president.

“We want preventative-type measures. Insurance is a component but it’s after the fact. We want to assist our customers in preventing identity theft. There are products out there that for relatively minimal fees allow customers to monitor their credit reports, and the companies can scan the reports. You’re alerted on a daily basis if there’s been any activity.”

Some consumer activists view the insurance with a wary eye.

Gail Hillebrand, senior attorney at Consumers Union, the publisher of Consumer Reports, says it’s usually not a good idea to purchase any single-purpose insurance policy.

“For instance, people should buy a health insurance policy, not one that just covers cancer.”

Hillebrand cautions consumers that if the insurance is free, make sure it’s permanently free and that you’re not signing up for an automatic renewal where you’ll pay a fee down the road.

“There’s also the risk of a false sense of security. You still need to monitor your credit reports and your bank statements. Debit card problems only show up on bank statements. Not credit reports.

“There’s an irony that banks, on the credit side, aren’t terribly good at checking that it’s you when they extend credit, and then they provide this insurance. We need creditors to take more care on the front end to prevent thieves from stealing accounts. We need more than insurance.”

Linda Foley, of the nonprofit Identity Theft Resource Center, says the credit monitoring is pretty much a waste of money, but if you do pay for it, make sure the service is checking all three credit reporting agencies.

“Not just the first time, but on a daily basis. Some check all three the first time and then monitor just one or two. If they’re checking all three bureaus five days a week, it has some merit. But it should be free. It’s not the consumer that has allowed identity theft to grow so explosively.”

Avivah Litan of Gartner, a research company, says consumer groups have a valid point but that the insurance is a step in the right direction.

“Banks need to be more proactive about closing security holes, but a lot of this is happening outside the bank’s domain. One of the best things consumers can do is catch the theft right when it happens and that’s what the Washington Mutual program does. It’s not the end all and be all, but it’s helpful, not harmful. It’s the cost of being an American consumer.”

U.S. Bank may have one of the most diverse identity theft insurance plans. For $9.99 per month, Privacy Guard monitors daily all three credit bureaus and notifies customers of any changes to their credit report. Customers also receive access to their Social Security records and their data on file with MIB, the medical information bureau, a clearinghouse that supplies records to insurance companies.

“We did a lot of due diligence on a number of different companies,” says Teressa Sund, of U.S. Bancorp investments and insurance. “There are a lot of components that other providers offer, but we wanted something at the best price point, the best value for customers.”

Is paying for identity theft insurance only for the nervous Nellies? How can you assess your risk? Even if you follow all the rules for preventing identity theft, there’s no guarantee. The Federal Trade Commission says most identity theft is done by people who have a legitimate reason to see your personal information – health insurance processors, car rental companies, employers.

It’s important to keep in mind that this insurance only covers identity theft involving credit fraud. These polices won’t help if someone uses your name when they’re getting a traffic ticket or has taken over your identity and owes taxes in your name.

Any real estate agent worth his or her salt will recommend that you have inspections done before buying a home. That’s good advice. But, completing a thorough home inspection can be easier said than done.

One issue is time. Most sellers want their homes inspected as soon as possible after the contract is ratified. But in active markets, like we’ve seen in recent years, the good inspectors become backlogged. It can be difficult to line up the inspector you want on short notice.

Multiple offers are still common in many areas, although the incidence is waning in areas where the inventories of homes for sale are growing. If you’re in a multiple offer competition for a home you really want to buy, you may need to have the home inspected before you make an offer. This way, you can make an offer that doesn’t include an inspection contingency and have a better chance of winning the contest. Still, this means you need to have the inspection done quickly.

Even if you are successful at arranging for a home inspection quickly, the home inspector may recommend that you have further inspections done by other specialists. This is one of the most frustrating aspects of the home inspection process for some home buyers.

Buyers often assume that if they hire a home inspector, they will learn all there is to know about the home they want to buy. Yet, home inspectors aren’t willing to take on liability for issues that are beyond their scope of expertise—nor should they. This means that, in many cases, the general home inspection is just the starting point.

Due diligence is an important part of home buying. Even though you may have a great real estate agent to assist you, it’s ultimately up to you to decide before you make a major purchase if there’s any reason why you shouldn’t. It helps if the sellers are conscientious about disclosing defects. But that’s not required in all states, and sometimes sellers aren’t aware of problems that you might consider serious. So, regardless of time constraints or competitive bidding situations, it’s in your best interest to know as much about the property you’re buying as possible before you close the sale. This is exercising due diligence and it enables you can make an informed decision about whether or not to proceed.

House hunting tip: It’s a good idea to establish a relationship with a home inspector before you find a house to buy. Ask friends and your real estate agent for recommendations. When you find an inspector you like, find out how far in advance you need to make an appointment and how long it will take to receive a written report. As soon as you decide to make an offer, try to make an appointment for an inspection. Some inspectors won’t make an appointment until you have a ratified contract.

Another aspect of the inspection process that can complicate matters for buyers is the fact that inspectors’ opinions are somewhat subjective. One inspector might see an item as a serious problem; another might minimize its importance.

Recently, sellers ordered a pre-sale termite inspection. The inspector said that the deck should be replaced due to dry rot, but he found no evidence of active termite infestation. Another inspector thought that the deck was fine and should just be maintained. However, he reported active termite infestation that needed eradication. Both inspectors were experienced and reputable.

The closing: When two inspectors don’t agree it’s often helpful to seek the advice of a third inspector.

The U.S. Senate, in a 74-25 vote, this week passed legislation that will tighten bankruptcy laws in an effort to crack down on abuses of the bankruptcy system. The National Association of Home Builders and Mortgage Bankers Association today issued announcements supporting the Senate’s passage of Senate Bill 256, dubbed the “Bankruptcy Abuse Prevention and Consumer Act of 2005.”

The proposed legislation, which is under review by a U.S. House committee, provides that homeowners who file for bankruptcy within 40 months of buying a home could protect no more than $125,000 of home equity from creditors, and after 40 months existing state homestead limits would apply. “This provision prevents a debtor from shielding assets by purchasing a home in a state with an unlimited homestead exemption, while also recognizing that states should have the ability to set homestead exemptions at levels they deem appropriate,” the National Association of Home Builders noted in an announcement.

Also, the proposed legislation contains provisions that would provide more protections to the owner of a rental property in the event a tenant declares bankruptcy.

“The legislation strikes a fair balance between the rights of tenants and property owners, and it also provides sufficient safeguards for home owners to protect their property in the event of a bankruptcy filing,” said David Wilson, president of the association and a custom-home builder from Ketchum, Idaho.

Under current law, delinquent tenants facing eviction can file for bankruptcy, which requires the property owner to stop eviction proceedings. Also, tenants can remain in a rental property for months without paying rent until a bankruptcy judge lifts this stay, according to the home builders’ announcement.

The Mortgage Bankers Association stated that under the current code, commercial and multifamily lenders “are vulnerable to abuses in single asset real estate bankruptcy cases where the asset was valued at more than $4 million,” and the proposed legislation would help to protect lenders from damages and expenses associated with foreclosure delays related to these bankruptcy cases.

If you buy a house and make less than a 20-percent down payment, it will cost you extra money in the long run because most lenders will insist that you buy private Mortgage Insurance (MI) or its equivalent. For a conventional loan, the 20-percent down payment level is the mortgage industry’s equivalent of the ‘Great Divide.’ If you put down anything less than that - meaning you are financing more than 80 percent of the home’s purchase price - you will have to pay for MI. With a loan backed by the Federal Housing Administration (FHA) you’ll pay a mortgage insurance premium (MIP). And if you get a VA (Department of Veterans Affairs) loan, you’ll pay what is called a ‘funding fee,’ another name for mortgage insurance. While VA’s funding fee cannot be cancelled, MI and MIP can – eventually.
Why does mortgage insurance exist? The answer is simple: It covers the lender’s risk of loaning us money. Even if you have a spotless credit history, a lender writing checks for $100,000, $200,000 or more want more than your name on a contract. The lender wants – and holds on to – the deed to your house. If you stop making mortgage payments, he or she can sell the house to recover his investment. But the lender doesn’t want to foreclose and sell your house because the procedure costs added money he is unlikely to recoup.

First, the lender can’t start the foreclosure process until the borrower is three months behind in mortgage payments. And the process of getting possession of the property can drag on for months. Every month the lender does not receive a check represents a loss of both principal and interest income. Second, lenders have learned that people who are about to lose their homes do not, as a rule, take good care of them. Repairs are usually necessary to make the repossessed house marketable. That takes more time and money. Every month the house is unoccupied represents more lost income. When it finally does sell, the real estate agent takes a commission, and the lender has to pay a share of closing costs.

It normally costs about 10 percent of a home’s value to sell it. So if the house was worth $100,000 and the lender had loaned $100,000 to the buyer, the most the lender can realistically hope to get is $90,000. That’s a $10,000 loss that doesn’t include missed payments, months of post-foreclosure vacancy, and so on. That’s why lenders decided some years ago to loan money only to people who could put 20 percent down, unless they had some sort of guarantee. That’s where mortgage insurance comes in. Each type of insurance guarantees that if the worst happens, the lender will not lose money on the deal. Each type of insurance, however, has its own rules.

The only mortgage insurance that cannot be canceled is the VA’s fee, and ‘that’s because it is a funding fee and technically not mortgage insurance,’ explains Jose Llamas, a VA spokesperson. While other types of mortgage insurance are paid on a monthly basis, Llamas points out that VA’s funding fee is a one-time, up-front payment that is usually added to the loan. The amount of the funding fee can be as high as 3.3 percent of the total amount of the loan – for veterans using their VA loan for a second time without making a down payment. The other end of the range is zero. There is no funding fee at all for veterans with service-connected disabilities, or for the surviving spouses of veterans who died in service, or as the result of service-connected disabilities. The normal funding fee for a first-time buyer with no down payment is 2.15 percent. For a veteran making a down payment of less than 10 percent, a 1.5-percent fee is imposed. For those making a down payment of 10 percent or more, the fee is 1.25 percent. A veteran making a 20-percent down payment doesn’t need a VA loan.

FHA’s mortgage insurance is split. There is an up-front payment of 1.5 percent of the total loan, which can be added into the loan amount. That is followed by a monthly insurance payment of one-half of 1 percent of the total loan. In one of those oddities of federal regulations, FHA’s up-front insurance payment does not apply to loans for condominiums. For those, there is just the monthly insurance payment. Both government-backed programs are self-supporting. Tax money is not used to pay lenders who lose money in case of a foreclosure. There is enough income collected to cover payments to lenders who might otherwise lose money on a deal.

As with mortgage insurance for a conventional loan, FHA insurance can be canceled - although the rules are different. With a conventional loan, once you build 20 percent equity in the house, usually through a combination of mortgage payments and increased property values, you can start to cancel your mortgage insurance. If your equity reaches 22 percent, MI is canceled automatically. With an FHA loan, you can cancel once you have reduced the amount you owe by 22 percent, but you must own the home for five years. That is the case even if you made extra payments to bring the principal down to 78 percent in less than five years. The difference is that unlike conventional mortgage insurance, the FHA looks at the amount owed on the loan, not the amount of equity you have in the home. Home appreciation is not part of the FHA equation. If you are using conventional financing, MI can be avoided altogether with a second mortgage. If your first mortgage is for 80 percent and your second is for 5 percent, 10 percent, or even 20 percent of the home’s value, you will not have to pay MI because your first mortgage does not exceed 80 percent. However, second mortgages carry a higher interest rate than first mortgages, and you will be facing two mortgage payments per month until the second mortgage is paid.

Regardless of the type of loan you get, if you don’t have 20 percent to put down, you will pay extra for the privilege of owning a house. If you can scrape together the larger down payment, it will pay you back down the road by avoiding the added costs of mortgage insurance. Even if you can’t reach the 20-percent threshold, when you compare the extra cost of MI to the many benefits of owning a home, you’ll realize it is a small price to pay. Those benefits range from the tax deductibility of mortgage interest to the satisfaction and security of having your own home. Once you own a home, you start building equity. This means when you sell that first home, you probably can buy the next one without mortgage insurance.

Source: Interest.com