Private Mortgage Insurance (PMI): Protection for Lenders
If you have bought a home with a loan more than 80% of your home's value then your lender will require you get an extra insurance i.e. the private mortgage insurance. To put it simply if you are a buyer with down payment less than 20%, you will usually be required to pay PMI.What are the benefits of PMI?
PMI has its own benefits. Take a look:- It protects a lender from any loss that may occur due to a default in loan by a borrower.
- It enables a prospective borrower to have greater access to homeownership even if he has less cash on him.
- It allows an individual to purchase a home with as less as 3% - 5% down payment.
- You do not have to wait till you can save enough money in order to buy a house.
What are the new PMI requirements?
There is a new federal law, The Homeowner's Protection Act (HPA) of 1998 that requires revelation regarding PMI for loans. These disclosures are required of lenders against PMI for loans secured by the consumer's main residence purchased before, on or after July 29, 1999. There are also provisions for automatic termination of the Private Mortgage Insurance as well as cancellation requested by the borrower.What does The Homeowner's Protection Act (HPA) of 1998 cover?
Normally, The Homeowner's Protection Act (HPA) of 1998 is for mortgage transactions for home buyers purchasing homes after July 29, 1999. However, it also applies to the loans obtained before July 29, 1999. VA and FHA are not covered under HPA. It has different requirements for 'high-risk' loans.Is there any way you can avoid PMI?
Of course and there are more than one way. Take a look:- Paying higher interest: If you accept a higher interest rate on your mortgage loan, your lender may waive the Private Mortgage Insurance requirement. This increase in rate depends on the down payment that you pay. It generally ranges from 0.75% to 1%. This mortgage interest is tax deductible.
- Opting for an "80-10-10" loan: Basically this plan involves 2 loans and a 10% down payment. Private mortgage insurance rates equaling 80% of the sale price finances 90% of the loan amount. The remaining 10% of the sale amount is financed by a second mortgage. Ideally this 2nd mortgage has a higher rate of interest but since the loan amount is only 10% of the total amount, the combined interest paid monthly is still lower than the amount to be paid if one mortgage pays for one mortgage insurance. Moreover, the mortgage insurance is tax deductible and this is an added advantage.
How does one cancel or terminate PMI?
PMI or Private Mortgage Insurance cancellation can be made in a few simple ways. They are:- Appraisal: Your private mortgage insurance cancellation depends on the value of your home. If the value of your home has risen recently then the mortgage insurance may be terminated. The equity in your home needs to fall below 80% loan-to-value-ratio as required by your lender for it to be eligible for cancellation. Your lender will need to see a valid home appraisal before he can terminate the mortgage.
- Remodeling: If you have made certain improvements in your home, it means that you have automatically increased the market value of your home. Hence the above mentioned principal also applies here.
- Paying your mortgage: If you can manage to bring your loan-to-value-ratio below 80% then you do not need to pay the PMI. Hence, small monthly payments can make a significant amount of difference.
- Opting for an "80-10-10" loan: Refer to the section under avoiding PMI.
- Automatic cancellation: As you reach 20% equity in your mortgage you have the automatic right to request for private mortgage insurance cancellation according to The Homeowner's Protection Act (HPA) of 1998. Moreover, lenders are instructed to automatically cancel PMI as soon as the borrower reaches 78% of the loan-to-value. You may opt for a private mortgage insurance calculator to help you better with your loans.
Private mortgage insurance is a boon for such buyers who cannot afford a large 20% down payment. This is to protect your lenders, and hence you, from a default that you make on your loan. So if you are considering buying a house with a homeowner's loan, be prepared to get PMI since your lender will require you to have one.
