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What is Private Mortgage Insurance or PMI? Private Mortgage Insurance or PMI is insurance that protects the lender in case a buyer defaults on a loan. Most lenders require PMI whenever a buyer is putting down
less than 20% of the purchase price of a home and then pass the cost on to the borrower.PMI does not, as some people believe, provide protection for a buyer, such as paying off the mortgage balance in the
case of death, disability or unemployment. PMI is required by lenders in most cases where the buyer's equity position is less than 20% of the home's value, because the less equity a buyer has in a home, the
more risk there is that s/he may default on the mortgage. If PMI protects only the lender, how does it benefit the buyer? The most important benefit of PMI is that it opens the door to homeownership for
many buyers, enabling them to buy a home sooner (often by several years) than they otherwise could, because they don't have to wait until they save a 20% down payment. Even buyers who can afford a 20% down
payment may opt to put a smaller amount down - usually for tax or investment reasons. In the past, PMI premiums were fairly consistent, ranging from .005% to .0025% of the loan amount per month depending
on the level of equity the borrower had in the home. Recently, PMI insurers made a beneficial change providing an alternative to the large up-front premium that borrowers traditionally paid when the loan
closed. Now, borrowers have the option of paying an up-front fee or paying a slightly higher monthly premium. A few lenders - Prudential Home Mortgage is one of the most prominent - offer buyers an
alternative to PMI. Basically, the lender self-insures, offering a loan to the buyer at a slightly higher rate, which compensates the lender for added risk of a low down payment loan. Going with the lender
who self-insures has two advantages: First, PMI companies sometimes turn down borrowers who lenders have already approved. With a self-insuring lender, this risk is eliminated. Also, the extra interest paid
may be tax deductible, unlike PMI payments, which are not. There are three main types of mortgage insurance:
Veterans Administration (AV)... VA insured loans are available to military veterans and certain other government workers
for a 1% fee. If you qualify, you can get a loan with no money down. However, lenders are unlikely to make very large loans since they are guaranteed reimbursement only up to $36,000.To apply for a VA
loan, you need a "Certificate of Eligibility", available from the local VA office. For more information, contact the VA office in the Federal Government listings in your phone book.
Federal Housing Administration (FHA)... Under
FHA insurance, anyone can obtain financing with less than 5% down. This is an attractive proposition for first time home buyers. If you are interested in this option, check with your lender. Some lenders
will not work with FHA loans because of the tremendous paperwork required by the government.The maximum loan amounts FHA insurance will cover are geared to the prevailing values in an area but typically
do not exceed $125,000. Borrowers must pay a one-time insurance premium of 3.8% of the loan total. This can be paid at closing or added to the amount of the loan. Private Mortgage Insurance (PMI)... Borrowers can get a loan with as little as
5% down through PMI. There is no limit on the amount of the mortgage.The premium varies from .3% to 1.2% at settlement and .3% to .55% a year thereafter. The rate depends on the size of the down payment
and the type of mortgage. The more you put down, the lower the premium. The change is lower for a fixed rate mortgage than for an adjustable rate mortgage. As an alternative to paying monthly premiums, you
can pay the entire fee in a lump sum payment. This amount can also be financed. Once the amount due on your loan has dropped below 80% of the purchase price or appraised value (whichever is less), you no
longer pay premiums. You must tell your lender and insurance provider this has occurred. They do not automatically stop requiring payments.
Your loan officer can provide additional information about private mortgage insurance. Latest Breaking News! PMI will now be dropped automatically
by your lender, but do check with your loan agent, once your home equity reaches 20% of its fair market value. |
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