Private Mortgage Insurance Bethel Park PA
Bethel Park, PA
Upper St Clair, PA
Bethel Park, PA
Private Mortgage Insurance
Lenders generally insist on private mortgage insurance when you are purchasing a house if your down payment is less than 20 percent of the total value of the house. PMI helps protect lenders against losses due to the default of a borrower and subsequent foreclosure on the home. When determining if a mortgage loan should be made, a lender wants to make sure that the property in question can be sold without loss in the event that the borrower defaults on loan payments.
The good news is that by insuring lenders against risk, PMI helps homeowners obtain financing when they can't afford to make the standard 20 percent down payment. The initial down payment can sometimes be as low as 3 percent, as long as the borrower (you) is willing to pay an extra monthly or annual charge for the PMI.
What PMI Does
Private mortgage insurance is an easy, flexible and inexpensive way for you to buy a home with a low down payment. PMI enables you to buy a home with a down payment of as little as 3 percent instead of the 20 percent down payment lenders traditionally require for loans without insurance. And there is another benefit to that you can buy a house and start building home equity years sooner. The average home buyer can purchase a house 10 years earlier by using mortgage insurance and making a 5 percent down payment instead of waiting to save enough for a 20 percent down payment.
If you are a move-up buyer and have enough income, mortgage insurance allows you to consider a wider range of homes. If you have $15,000 in savings or in equity in your current house and make a 20 percent down payment, you can buy a $75,000 home. With 10 percent down and an insured loan, you can buy a $150,000 home. With 5 percent down and an insured loan, you can buy a $300,000 home.
If you itemize on your taxes, mortgage insurance can save you money. The larger loan amount that results from a low down payment boosts your tax deductions for mortgage interest. If you choose financed single premium mortgage insurance or lender-paid mortgage insurance, you can enjoy even greater tax benefits.
Lenders require PMI on most conventional mortgages because experience reveals a strong correlation between borrower equity and default. The less money a borrower has invested in a home, the greater the probability of default. Depending on the type of PMI policy, the insurer will pay the lender from 20 to 30 percent of the mortgage balance if you default on your mortgage. That is generally enough to offset the cost the lender must incur to foreclose, repossess and resell your home.
If a homebuyer makes a down payment of 20 percent, the lender only has to lend 80 percent of the property's value. So if the lender had to foreclose on the property and sell it for 80 percent of its value, the lender doesn't lose any money, and PMI isn't necessary.
Because of the strong correlation between borrower equity and default, without the financial guaranty of PMI, lenders will typically require a down payment of at least 20 percent.
What You Need to Know About PMI
Private mortgage insurance is available on a variety of loans and loan amounts. Your lender can help you determine which premium plan is right for you. Your lender will also make all the arrangements for obtaining insurance from the mortgage insurance company. Lenders typically pass the costs of lending money on to borrowers, and mortgage insurance is one of those costs. Lender-paid mortgage insurance policies are also available, but then the lender charges you a higher interest rate on the mortgage.
The cost of mortgage insurance depends on several factors: the size of your down payment, the type of mortgage you are getting, and the amount of coverage the lender or investor requires on your loan. The PMI premium for a fixed-rate mortgage is often less than the premium for an adjustable loan. Premiums are based on the amount and terms of the mortgage and will vary according to the loan-to-value ratio, type of loan and the amount of coverage required by the lender. Private mortgage insurance is used with conventional financing only. A conventional mortgage is a loan not obtained under a government-insured program. Institutional investors such as banks or insurance companies typically hold conventional mortgage loans.
Mortgage Insurance Is Not
It is easy to confuse private mortgage insurance with other types of insurance associated with homeownership. Private mortgage insurance is not mortgage life insurance, which pays off a mortgage if you die or become disabled. It is not homeowners insurance, which protects you from loss due to theft, fire or other disaster. Mortgage insurance protects the lender and investor, not the borrower.
Private mortgage insurance also is not the same as the government mortgage insurance program run by the Federal Housing Administration. Private mortgage insurance is available on a wider variety of loan products and loan amounts than FHA insurance, and it generally costs less. Private mortgage insurance usually can be canceled, while most FHA borrowers must pay insurance premiums for the life of the loan.
When Can You Cancel Your PMI?
The Homeowners Protection Act of 1998 which became effective in 1999 establishes rules for automatic termination and borrower cancellation of PMI on home mortgages. These protections apply to certain home mortgages signed on or after July 29, 1999, for the purchase, initial construction or refinancing of a single-family home. These protections do not apply to government-insured FHA or VA loans or to loans with lender-paid PMI.
For home mortgages signed on or after July 29, 1999, your PMI must with certain exceptions be terminated automatically when you reach 22 percent equity in your home based on the original property value, if your mortgage payments are current. For example, say you purchased a house valued at $100,000, paid $5,000 down, and financed $95,000. Your PMI would be canceled when your equity reached $22,000; i.e., when the principal balance of your loan reached $78,000.
Alternatively, rather than waiting for your lender to cancel the PMI, you can request that it be canceled when your equity reaches 20 percent of the original value of your home (as long as it hasn?t decreased in value and your mortgage payments are current).
There are certain exceptions, however. The decision on when to cancel the private mortgage insurance coverage does not depend solely on the degree of your equity in the home. One exception is if your loan is high risk; i.e., your credit record/history is poor. Another is if you have not been current on your payments within the year prior to the time for termination or cancellation. A third is if you have other liens on your property. For such loans, your PMI may continue. The final say on terminating a private mortgage insurance policy prior to 22 percent equity buildup is reserved jointly for the lender and any investor who may have purchased an interest in the mortgage.
On a $100,000 loan with 10 percent down ($10,000), PMI might cost you $40 a month. If you can cancel the PMI, you can save $480 a year and many thousands of dollars over the life of the loan. Check your annual escrow account statement or call your lender to find out exactly how much PMI is costing you each year.
Some states have laws that apply to early termination or cancellation of PMI even if you signed your mortgage before July 29, 1999. Call your state consumer protection agency for more information about your states rules. Fannie Mae and Freddie Mac, which buy home mortgages from lenders, also have guidelines affecting termination or cancellation of PMI on home mortgages signed before July 29, 1999. Under Fannie Mae guidelines, the loan servicer must cancel PMI if the homeowner requests it and if the unpaid balance of the loan has been paid down to 80 percent of the original value of the property. But the servicer may require the homeowner to submit a current appraisal to demonstrate that the property has kept its value. Freddie Mac's guidelines are more rigid because they require the loan servicer to assert that the current value of the property is at least equal to the original value.
What If Your Home's Value
When making mortgage payments, most of the payments during the first few years are finance charges. Therefore, it can take 10 to 15 years to pay down a loan to reach 80 percent of the loan value. If the home prices in your area are rising quickly, your property value may increase so that you can reach the 80 percent mark a lot faster. Your property value could also increase due to home improvements that you make to your home. If you think your home value has increased, your equity in your home may be sufficient to enable you to cancel PMI on your mortgage. Although the new law does not require a mortgage servicer to consider the current property value, you should contact the servicer to see if he or she is willing to do so. Also, be sure to ask what documentation may be required to demonstrate the higher property value.
Fannie Mae and Freddie Mac
For More Information
The Federal Trade Commission works for the consumer to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or to get free information on PMI or other consumer issues, visit http://www.ftc.gov or call toll-free, 877-382-4357, TTY, 866-653-4261.
The FHA is also a source for PMI information at http://www.hud.gov or http://www.fha.com , 877-273-1087.
Contact Fannie Mae, at 800-732-6643, http://www.fanniemae.com , and Freddie Mac 800-373-3343, http://www.freddiemac.com , to request a copy of either entity's PMI rules and to discuss other PMI concerns.
Milton Zall is president of Zall Enterprises, an editorial consulting firm based in Silver Spring, Md. He writes on taxes, investments, technology, the Internet and HR/business issues. He is a certified internal auditor and a registered investment advisor. He can be reached via email at email@example.com.