Private Mortgage Insurance - PMI
What is Private Mortgage Insurance?
You have heard about this. What is PMI or private mortgage insurance? Private mortgage insurance is an insurance that home buyers are required to purchase if their down payment is low. Home Mortgage insurance is usually required of home buyers whose down payment is 20 percent or less of the property’s sale price or appraised value. This PMI mortgage insurance was created by private mortgage insurers, and was created to provide protection for the lender in the case that the home buyer should default on the loan.
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Home Mortgage insurance has helped create millions of new home owners by allowing people to buy homes with much smaller down payments than had previously been accepted. As home prices continue to increase, the ability to purchase a home with a small down payment has become even more important. PMI or home mortgage insurance allows potential homeowners to buy a home sooner, with even just a 5 or less percent down payment. Also, private mortgage insurance can help you qualify for a greater number of home loans.
How is PMI Mortgage Insurance Calculated?
The cost of PMI mortgage insurance varies according to the percent down payment and home loan mortgage, but it typically equals approximately one half of one percent of the total amount of the loan. But how exactly is private mortgage insurance calculated?
For example you bought a house for $100,000, for which you put set down a 10 percent down payment. Your lender will multiply the remaining 90 percent by .005 percent. This will be $450. So, $450 is your annual PMI mortgage insurance, which is divided into monthly payments. In this case your monthly home mortgage insurance will be $37.50.
If you have been paying off your monthly mortgage payments regularly, then after a few years of paying down your home mortgage loan, you should be able to eliminate the private mortgage insurance. You should keep track of your payments and contact your lender when you reach 80 percent equity so that your private mortgage insurance can be eliminated i.e. you do NOT need to pay for the mortgage insurance.
The 1999 Homeowner’s Protection Act Affects Home Mortgage Insurance
In 1999, a new law, the Homeowner’s Protection Act, was passed that requires lenders to notify you, the home owner, how many months and years it will take for you to pay the 20 percent of your principal. But, it is still a good idea you as a home owner to keep track of the mortgage payments on your own.
This same law also allows lenders to make certain buyers continue their private mortgage insurance, all the way to 50 percent equity. This requirement applies to buyers classified as high risk borrowers. In some cases, Federal Housing Administration loans may even require that home buyers acquire Private mortgage insurance through the lifetime of the loan.
If the idea of paying private mortgage insurance for years sounds unappealing, you’re not alone. Over the years, new ways of avoiding payment of the home mortgage insurance - even when you don’t have the 20 percent down payment available—have emerged. One strategy commonly employed to avoid paying PMI mortgage insurance is to pay more interest on your mortgage loan.
Some lenders will waive the private mortgage insurance requirement if the home buyer agrees to pay a higher interest rate on their mortgage loan. One advantage to this strategy is that mortgage interest becomes tax deductible.
An alternative way to avoid paying private mortgage insurance is by using the ’80-10-10’ loan strategy. This strategy involves taking on two loans and putting down a 10 percent down payment to purchase a home. One loan finances 80 percent of the mortgage, while the second loan finances the remaining 10 percent of the sales price.
The second mortgage - the one that covers the 10 percent - has a higher interest rate. But since the amount of the loan is low, the interest charges are relatively easy to pay off. Under this plan, the mortgage interest is also tax deductible.
You could cancel your PMI mortgage insurance if you can prove that your home has increased significantly in value. If the value of your home has gone up, you may already have 20 percent (or more) of the equity you need to cancel your private mortgage insurance. You can submit evidence of this to your mortgage lender, but the process is slow. Expect to wait up to two years for the lender to make a decision.
You may be required to continue paying PMI mortgage insurance, however, if you have a poor payment history, or if your credit record reflects any liens placed against your property. Paying off the mortgage regularly leads to better credit history and you will become low-risk borrower. This can help you eliminate your mortgage insurance. If you communicate this to your money lender, they will give you tips on how changes to your credit record will affect your use of private mortgage insurance.
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March 16 2008 05:00 am