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Home Loan & Home Mortgage Article Series
What
is PMI: Private Mortgage Insurance?
What is PMI? PMI,
or private mortgage insurance, is an insurance that home
buyers are required to purchase if
their down payment is low. Private 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
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.
Private mortgage insurance has helped create millions of new
homeowners by allowing people to buy homes with much
smaller down payments than had previously been accepted. As home prices
continue to soar, the ability to purchase a home with a small
down payment has become even more important. Private mortgage
insurance allows potential homeowners to buy a home sooner,
with even just a 5 percent down payment. Also, private mortgage
insurance can help you qualify for a greater number of home
loans.
The
cost of private mortgage insurance varies according to
the down payment and mortgage loan, 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?
Let’s assume 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. The result, $450,
is your annual private mortgage insurance, which is divided
into monthly payments.
After a few years of paying down your mortgage loan, you should
be able to stop paying 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 cancelled. In 1999, a new law, the Homeowner’s Protection
Act, was passed that requires lenders to notify you, the buyer,
how many months and years it will take for you to pay the 20
percent of your principal. However, it is still a good idea
to keep track of it 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. Some 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 private mortgage insurance—even
when you don’t have the 20 percent down payment available—have
emerged. One strategy commonly employed to avoid paying private
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.
Another 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 may also be able to cancel your private 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 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 private mortgage insurance,
however, if you have a poor payment history, or if your credit
record reflects any liens placed against your property. You
should speak to your lender to see how any changes in your
credit record may affect your use of private mortgage insurance.
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SolveYourProblem.com : 2007
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