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Will you be required to pay for Private Mortgage Insurance?Most lenders will require you to carry PMI if you cannot put 20% or more of your loan amount forward as a down payment. PMI protects the LENDER in case you default on your payments. PMI does not protect you, the borrower.The lender will secure the PMI policy for you, and you will pay for it. Most people choose to have PMI added to their monthly mortgage payments, but other payment arrangements are possible. The monthly cost of PMI is based on your loan amount. An approximate cost of PMI for a $100,000.00 loan is about $50.00 a month. Your Magic Number: You see, over time, the property will appreciate at the same time you are slowly paying down the mortgage balance. Once the property's "current market value" exceeds the loan balance by 20% or more, you should be elgible to cancel the PMI insurance. Confront your lender when this time nears. Ending your private mortgage insurance early: It’s Not Always Automatic. Not all people have the convenience of having their PMI automatically cancelled. The Homebuyer’s Protection Act that requires lenders to do this does not cover loans that closed before July 29, 1999. It also does not cover VA loans or FHA loans. So be aware that you might not have someone else taking care of this for you. Check it out! PMI is not fool-proof. Homeowners can sometimes eliminate private mortgage insurance by refinancing their loans -- even if they continue to owe more than 80 percent of the value of the house. And there are new laws that require lenders to remove PMI if a mortgage does not exceed 80% of the value of a home. But, this new law only applies to loans recorded after July 29, 1999. If a borrower has a loan that was recorded before July 29, 1999 and thinks he might like to cancel the mortgage insurance after a few years, he could, depending on the conditions and whether the insurer allows cancellation. The most common method used to avoid paying private mortgage insurance is for a borrower to get a "piggyback loan" - a second mortgage that allows him to make a 20 percent down payment. For example, a borrower can pay 10 percent down, get a first mortgage of 80 percent, and a second mortgage of 10 percent. The piggyback loan is always at a higher rate. The borrower is not paying for PMI, but is still making a monthly payment, probably for roughly the same amount as PMI. A piggyback loan also has an income tax advantage because it allows the borrower to deduct the interest from his taxable income. However, he can’t deduct the cost of PMI. For homeowners who owe between 80 and 83 percent of the house’s value, the best way to avoid PMI when refinancing the loan is to find a lender that won’t immediately sell the mortgage on the secondary market. Generally, to eliminate PMI, a homeowner must have a spotless mortgage payment history and be able to fit a certain profile of borrower. Examples of good candidates include:
Impact of Your Loan Being Sold by the Lender: Even with these credentials, the homeowner must try hard to find a lender that keeps mortgage loans on its books and is willing to take the risk. Most mortgage lenders don’t hold loans for long. They bundle mortgages together and sell them to large investors such as big banks, insurance companies, pension funds and institutions such as the Federal National Mortgage Association, known as Fannie Mae. The reason for selling mortgages is to free up money to lend again because the original lender gets most of its money (and profit) from fees and the sale of the loan, not from interest. The investors who buy pools of loans ultimately earn the interest that borrowers pay. PMI assures investors that their bundles of loans won’t go bad. Homeowners
who put less than 20 percent down are more likely to default. That is why
they’re required to have private mortgage insurance. Otherwise, the loans won’t
be marketable. |