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Author: synchronicityII Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 22990  
Subject: Re: Mortgage broker Date: 1/28/2013 6:40 PM
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Heya! Long time no talk.

Haven't talked with you for a while, hope all is well, and you're enjoying Texas. I think that's where you moved. Was back in Chicago recently for a cousin's funeral, still love that town and great to see how the city has grown, but the weather hasn't improved.

Yup, Texas. It's like "the land beyond O'Hare" EVERYWHERE, which...well, takes some getting used to.

Sorry to hear about your cousin. Yeah, the city keeps growing. The weather still sucks. Texas winters are about the only thing I prefer (in general, still miss the snow) over Chicago.

Will trust your spreadsheet, what did you determine the break point for doing one loan with PMI or splitting it into two loans and not having PMI?

At 2% annual home price appreciation and 4% cost of funds, it takes 3 years before we can get rid of the PMI, and 5.5 years for the "one loan with the earlier PMI" to be better than 2 loans. This is assuming a 25% marginal tax rate on the interest that's deducted (assume for the moment that I've done the legwork to determine that that is a very close to accurate number currently).

Cost of funds has little impact on the results, home price appreciation (or the lack thereof) is what really moves things. If we assume housing stays flat, the years change to roughly 5.5 and 9.5. Obviously if housing drops from current levels, one could also use a "how long til it gets back to current" as the question. FWIW, the Case Schiller indices have DFW home prices up ~4% for the 12 months ending Oct 2012, and DFW prices never dropped as severely as in other areas. They tend to be less volatile overall both up and down.

For various reasons my gut is thinking one loan rather than 2, mainly because I like locking in low interest rates. But maybe my gut has eaten too much pepperoni pizza. I'd be curious what your thinking is re: two loans instead of one and PMI.

One suggestion, the PMI rates you quoted elsewhere in the thread are as negotiable as the interest rate and do differ among various lenders. I'm a little surprised a broker would give hard and fast percentages on PMI, it's really a function of which PMI company issues the insurance. As a broker chooses which end lender to place the loan, each lender may have a different PMI factor. At the bank where I originate loans, I see various PMI costs. However I do not get to choose which PMI company is used, my bank makes that selection after the loan funds. The bank prefers to minimize risk by spreading PMI insurance over many different providers. When someone asks me specific PMI factors, I quote the highest cost provider. After the loan funds, I've received phone calls as to why the PMI is less than I quoted.

As you can guess, I've looked up the rate cards from several PMI providers in the past (yes, I'm sick, I know, I KNOW), although I haven't done so since the middle of last year. In general the PMI rates were all within the same general ballpark, so I just went with an "average" and figured that was good enough for my purposes. I neglected to adjust my PMI rates for a jumbo mortgage and now note (looking at the pdf for a rate card I'd saved) that there's an upward adjustment to the rates for jumbos for that provider. (the pmi provider was "pmigroup.com" for that one, it was a +25 bps adjustment).

My guess is that the broker was ballparking the PMI (the exact rate she was using in her example was .70%)

Thanks for the insights on PMI, it is much appreciated. Feel free to SEC me, or I might SEC you with a couple questions.

-synchronicity
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