November, 2002

House-Building Home Page

house-building.com NEWSLETTER #210
New House Building: Money Saving, Convenience and Healthy House Tips

James Todd.
November, 2002

Beginning with this edition, newsletters will now be archived
online at: http://www.house-building.com/newsletters/newsletters.html


CONTENTS:

1. Private Mortgage Insurance (PMI)
   When and How you can discontinue your PMI Insurance
2. The 10 most common mistakes in the building of a new home, Mistake #2
   Guest article, by Chris McMinn, Professional Cost Analyst and Consultant
3. Useful Links
4. Thought for the Day
5. Subscription Information
   

Please forward this newsletter to anyone whom you think may be interested!


1. Private Mortgage Insurance

Private Mortgage Insurance, or PMI as it is known, is an insurance policy required by lending institutions when the borrower does not have a 20% or greater down payment to put towards a mortgage.

PMI has enabled millions of consumers to purchase homes with a very small down payment. Without PMI, these people would not have qualified for a mortgage. PMI has played a significant role in enabling these consumers to buy a home years sooner than they otherwise would have been able to.

PMI comes with a hefty price tag. On average, PMI cost four to six tenths of a percent of the loan amount (.4% - .6%). On a 100,000 loan that equates to $400-$600 per year. Frequently the cost for PMI is included in the monthly loan payment so it often is forgotten.

It is estimated that more than 2.7 million homeowners are continuing to pay for PMI insurance needlessly. Make sure you are not one of these. Why throw hundreds or even thousands of dollars per year away for no reason.

In 1998 the Homebuyers Protection Act was passed by Congress. This law, applicable to most standard conforming mortgages, requires lenders to cancel your PMI when your equity reaches 22% of the original value of your home for all property purchased after July 29, 1999. Alternatively, you can request the cancellation of PMI when your equity reaches 20% of the original value of your home.

Homes that were purchased before July 29, 1999 are not covered by the law (unless they were refinanced after this date) and the lender has no obligation to cancel PMI once your equity reaches 20%. If you are a homeowner in this situation you will need to contact your lender and request (insist) that it be cancelled.

For example, let say you purchased a $100,000 home with a 10% down payment. Your PMI would be automatically cancelled when your principal balance reaches $78,000. However, you can and should contact your lender when your principal balance reaches $80,000 (20% equity) rather than waiting until the automatic cancellation occurs.

Based upon this example you would need to pay down $10,000-12,000 of principal. This may not seem like much, but it will take more than 10 years to pay down this principal amount. During that timeframe you will have likely paid $5,000 or more in PMI.

There is another way that PMI can be cancelled; use the increased value of your home to demonstrate your 20% equity position. This is more difficult to do, but it is a valid approach and probably worth your time, based upon the likely amount that you are paying for PMI.

Over the past several years, with mortgage interest rates reaching a 40-year low, property values have increased substantially in many parts of the country. For example, let’s say that the $100,000 home mentioned above, which you purchased three years ago is now worth $130,000. Further, lets say that your original loan balance of $90,000 is now $87,000 after three years of mortgage payments. Your equity percentage in the property based upon its current value is 33%, well over the required 20%. Unfortunately, lenders are not required to take into account the current property value, though many will, if you can document the increased property value. Given the cost of PMI it is well worth some amount of time and effort to talk with your lender, find out the requirements for canceling PMI, and then gather and provide this documentation.

The following website contains additional information about PMI and also has a mortgage calculator that can help you determine whether or not you should still be paying PMI. It is: www.frbsf.org/publications/consumer/pmi.html


2. The 10 Most Common Mistakes in Building Your New Home

This is the second in a series from Mr. Chris McMinn. His firm, McMinn & Associates are professional cost analysts and consultants. They review and analyze a large range of residential and commercial construction projects, applying the same methods and techniques of cost engineering to residential construction projects as they do for their commercial customers.

If you are looking for a professional cost consultant, we encourage you to contact Chris. If you are looking for written Guide to many of the same issues Chris points out, we encourage you to take a look at the House Building Guide.

Copyright © 2002 C. S. McMinn

The Second pitfall: Inadequate plans used to obtain actual bids.

Let's say you've bought a set of plans from those plan magazines we all see in stores. You've determined you can borrow enough to build a 2,000 square foot home, have made an offer on a flat lot with utilities in the street and you want to get serious with some local contractors. You know you can get a construction loan for $250,000, excluding the land. What could possibly go wrong?

When you hand those plans over to your list of contractors, do you know if they are truly complete? Do you have any idea what a full set of plans really looks like? Again, most homeowners assume that if plans are good enough to obtain a building permit, they are good enough to obtain bids.

Nothing is further from the truth. Contractors know this, even as most homeowners are clueless. No matter what figure that contractor gives you, it is worthless without full specifications. Very few contractors will consider generating such specifications for you without a hefty chunk of money up front. They know that once construction starts, a process will begin in which multiple births will occur. You will discover a new maternity ward, filled with triplets and quintuplets. But each one will be a change order. Every one will increase your bottom line costs.

Step by relentless step, you will find out just how many details were never included in those pre-packaged plans. Starting with a topographical survey, you discover you need a soils engineer, upgraded water meter hookup, encroachment permit, new electrical service, storm drains, approval from bureaucratic entities you've never heard of... But of course, few contractors spell this out. They simply state that to reproduce what's shown on those sheets of paper will cost "x." You innocently assume this is the final figure, oblivious to all those expenses that are then discovered piecemeal– one shock after another.


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Although those hidden costs are legitimate, most include time and material billings from your contractor. Did he know before hand? Of course. Why didn't he tell you? A few will– most leave you to find out for yourself. Most homeowners, in their rush to see the dream unfold, gloss over these niggling details. And those few contractors who are totally up front in their approach, who spell it out in almost brutal honesty, are rarely selected because they paint an exorbitantly high picture of the final cost. "It could never be that high!" you say, walking away. After a while, that contractor keeps his mouth shut too.

What can you do? Get complete plans. Space does not permit a full explanation, but you need level three plans for your project.

Coming Next Month, "The Third pitfall: integrating and matching bids with specifications."


3. Useful Links

The following are useful links relating to the modular housing industry may be of interest.


United Design Associates – This website contains an assortment of home plans, home building software programs, and professional services for builders and homeowners. http://www.uniteddesign.com/


Home Building Workshops provides training classes and seminars for those interested in learning more about the homebuilding process.
http://www.homebuildingworkshops.com


SmartHomeBuy – This is a great website where you can purchase a report for a property of interest for $5. This report will provide details on crime rating and statistics, environmental hazards, neighborhood demographics, school district, property valuation and much more. http://www.smarthomebuy.com/AddressEntry.asp


4. Thought For The Day – Morality and Ethics

There is no such thing as a right to do a wrong. -- Abraham Lincoln

Do you have tips or suggestions you would like to share with others? Please email these to
info2@house-building.com