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Private Mortgage Insurance
What is Private Mortgage Insurance
Private mortgage insurance (PMI) is a policy that
protects lenders who make loans to individuals who want to buy or
refinance a home, but are unable to come up with the required 20%
down payment.
Private Mortgage Insurance Facts:
PMI plays a valuable role in expanding home ownership.
With PMI, families can purchase homes with as
little as 3-to-5 percent down payment on a home.
Nearly 1 million people a year buy or refinance a
home with PMI.
PMI cost home owners between $20 to $100 per month.
PMI can be canceled, under certain conditions, when
a good payment history is met and 20% or more equity is achieved on
the cost of the home.
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HOME INVENTORY
Private Mortgage
Insurance (PMI)
Low down payment mortgages are somewhat
risky for lenders because you are more likely to default on a loan in which
you have very little invested. If a default occurs, the lender must sell the
home and pay foreclosure costs out of the proceeds, before applying any money
to the loan balance. Lenders often lose money on foreclosures.
Lenders generally require you to
purchase private mortgage insurance (PMI) if you are borrowing more than 80
percent of the value of the home you are purchasing (i.e., your down payment
is less than 20 percent). PMI guarantees your lender will be paid if you default
on your mortgage. PMI does not protect you against losing your house in the
event of a default, however. Moreover, the insurance company may be able to
seek recourse against you for any default claim they pay to your lender.
How much does PMI cost?
Monthly PMI premiums are typically $45 to $65 per $100,000 borrowed, although
actual rates may vary substantially from this estimate. The cost of PMI depends
on several factors, such as the amount of your down payment, the type of mortgage
you take, and whether you pay premiums on a monthly basis or in a lump sum at
closing. PMI premiums can significantly increase your monthly housing cost,
but without it, you may be unable to qualify for a mortgage.
Can you cancel your PMI coverage?
PMI protects the lender, not the borrower. Thus, lenders generally want to keep
PMI coverage on your loan for as long as possible. Of course, since you pay
the premium, you will want to cancel the policy as soon as you are able. Before
taking a mortgage, ask your lender about PMI cancellation policies. Some lenders
will not allow PMI coverage to terminate during the life of the loan, while
others simply require an appraisal showing you have 20 percent equity in the
home and a clean payment history. Equity can be built in several ways. Your
equity increases when the principal balance on your mortgage decreases, and
also when the value of your home increases (because of improvements to the home
or fluctuation in market value of homes in your area). If your lender states
that your policy can be canceled once you reach a certain equity level, get
written confirmation.
Are there any mortgage types which
do not require PMI?
Some mortgages (such as FHA loans and VA loans) are insured by the government.
Although a low down payment is usually acceptable on these mortgages, PMI is
not required.
Is there any way you can avoid
paying PMI?
If you don't have at least 20 percent for a down payment, there may be an alternative
to paying PMI premiums. Consider asking if your lender is willing to increase
your mortgage interest rate a quarter of a point, rather than require PMI coverage.
Your monthly payment will increase by roughly the same amount as the monthly
insurance premium. However, mortgage interest is tax-deductible, whereas PMI
payments are not.
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Private Mortgage Insurance (PMI)
How to save up
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PMI
If you paid less than 20% down on your mortgage purchase when you bought a home,
you may be one of the millions of homeowners that pay an average $80 per month
more than you need to. Unnecessary Private Mortgage Insurance (PMI) is the reason
why.
PMI actually starts out as
a good thing for home buyers. It allows people with very little cash
to buy a new home. PMI is written by private companies, and protects the lender
if a buyer should default on a loan by compensating the lender if the home must
be resold for less money. There is a higher rate of default among buyers who
make low down payments. Because of PMI, lenders are willing to take more "risks"
with loans.
About one in every ten borrowers
is required to buy PMI by their lender. However, some homeowners are unaware
of the fact that once they have acquired 20% equity (that's 20% of the original
loan amount, not the present value of your home), there is no
longer any valid point in carrying PMI.
Not so long ago, there was
a fairly common practice among private lenders and banks of letting a borrower
continue paying PMI premiums for the life of the loan. The lender pays the premium
for PMI, and generally recoups this cost by tagging it onto your loan when you
sign at closing. Even if the lender stops paying their premiums, you continue
to pay the lender through your monthly mortgage payment. This was an attractive
bonus for lenders, and many chose never to inform borrowers that they could
drop the payments. Then in 1995, Rep. James Hansen, R-Utah, learned about this
practice when he bought property in Washington. According to the Associated
Press , When James asked his lender to remove PMI, the lender told him, "we
don't have to take it off." A very angry representative from Utah then
went about making sure bills were drafted to address this arrogance, and the
"phantom protection."
Representative Hansens' Bill,
and another like it, resulted in a new federal law in July, 1999. This law requires
lenders to cancel PMI when a homeowners' equity reaches 22%. Lenders must notify
new consumers of their cancellation rights and provide names and numbers for
PMI representatives. Under this law, homeowners also have the right to request
cancellation of PMI when their equity reaches 20%. Eight States already had
some form of PMI legislation in place, and the federal government has allowed
them to bring standards up to federal levels within the next two years.
So... if you have at least
20% equity in your loan, have a good credit record, and you've made all of your
mortgage payments on time, you need to pick up the phone or send a letter to
your lender. Simply state that you no longer wish to pay PMI. Each lender has
slightly different rules for canceling PMI premiums. Some require good payment
records, others want a minimum of 24 consecutive monthly payments, many require
that a new appraisal be completed at the borrowers' expense (although you will
quickly recoup the approx. $300 fee with lower monthly mortgage payments). Nearly
all lenders and investors will require a loan balance below 75 to 80 percent
of the (owner occupied) property. Also, mortgages are commonly "sold off"
to Fannie Mae (Federal National Mortgage Association) or Freddie Mac (Federal
Home Loan Mortgage Corp.). Freddie Mac usually requires that a homeowner carry
a mortgage for 5 years before dropping PMI.
Remember that there are many
ways to grow 20% equity in your home. You might add a room to your house, or
other homes in your area might have their value increase. Last, be aware that
there is a difference between PMI and FHA mortgage insurance. FHA insurance
is federally controlled, and lasts for the life of the loan. FHA is useful for
borrowers that may have trouble securing a loan due to credit history problems.
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Homestore.com: Finance & Insurance - Insurance - Why PMI?
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Insurance
Why PMI?
By Edith Lank
Realty Times
Banking theory holds that it's dangerous to lend anyone more than 80 percent of the value of a house. If the homeowner fell down on payments, and the house were seized and sold at a foreclosure auction, it might not bring enough to cover the loan, legal expenses of the sale, unpaid property taxes and lost mortgage payments. Then there could be the cost of holding the property till the sale -- possibly insurance premiums, heating bills, even lawn cutting.
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So bank regulators ruled it was irresponsible to risk depositors' money (which is where mortgage loans came from in the simple good old days) by lending more than 80 percent of the property's value.
Where did the rest of the purchase price come from? Easy. In the old days, people didn't buy houses until they had considerable savings. Then came the Great Depression, and with lots of housing standing empty, the government stepped in with a new idea: homebuyers could pay for insurance that would protect the lender against loss in case of default. (It wouldn't protect or reimburse the borrower, of course, just the lending institution.) Once the buyer agreed to pay premiums for that FHA insurance, banks were safe in lending almost the full value of the property. Low down payment! But on only the modest houses the plan was intended to rescue.
Then came World War II, and the GI bill (the same one that sent millions of returning servicemen and women back to school) set up an even better deal. At no cost to the veteran, the government would guarantee the top 25 percent of a mortgage loan. With a guarantee like that, banks needed no down payment at all on a VA mortgage loan. Nothing down!
FHA and VA mortgages had some limitations, however, and gradually the concept of private mortgage insurance (PMI) evolved. Now lenders could offer a variety of conventional morgages, with less than 20 percent down, if the borrower agreed to pay PMI premiums.
The question that arises, of course, is—must the borrower continue to pay for that protection once the debt has been paid down to less than 80 percent of value?
Some private mortgage policies contain varying answers. Some states have addressed the issue. In New York, for example, PMI can be cancelled (at least it's supposed to be) when the loan drops to less than 75 percent of the property's value.
The question always arises, though. Does that mean 75 percent of the original purchase price, or 75 percent of current value? If the latter, must the homeowner then pay several hundred dollars for a new estimate of value by the lender's appraiser?
And does the homeowner have to request that PMI be dropped, or will the lender do it on its own initiative?
The answers are all over the place.
Recently, the federal government stepped in with new regulations. For mortgages placed after July 29, 1999, PMI coverage can be dropped at the borrower's request when equity reaches 20 percent (that is, the loan drops to no more than 80 percent of value), and in any event it must be dropped when equity reaches 22 percent.
Light at the end of the tunnel!
Edith Lank has been called the "Dear Abby of real estate". A licensed broker, she has answered tens of thousands of personal letters from readers who sent in questions to her syndicated real estate column. Her award-winning column is carried by more than 100 newspapers nationwide. Edith has authored several books that answer the most important questions buyers and sellers ask during a real estate transaction. She also appeared on television and public radio.
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