Tips & Tools : PMI

What You Need to Know About Private Mortgage Insurance

RE.com Tips & Tools — Fri, 13 Jul 2007 19:15:00 GMT

PMI lets you buy a house with less than 20 percent down -- in exchange for higher payments.

Private mortgage insurance is just what the name implies: insurance that covers the lender in case the home buyer defaults. If you put less than 20 percent down on most mortgages, chances are your lender will require you to have private mortgage insurance, commonly known as PMI.

Unless you have a government-insured loan, such as an FHA or VA loan, you don’t have much choice in the matter. And the benefit of private mortgage insurance is it allows you to buy the home you want even if you don’t have a large down payment. The lender will obtain private mortgage insurance for you.

Paying private mortgage insurance

There are a couple of ways to handle your private mortgage insurance payment.

One popular payment method is to include private mortgage insurance as part of your monthly mortgage payment. PMI generally costs about one-half of 1 percent of the cost of your house, or $75 a month for an $180,000 mortgage.

Another way of paying for private mortgage insurance is to finance it when you get the mortgage. That would generally increase your interest rate, possibly by one-half of 1 percent. Mortgage interest is likely tax-deductible while private mortgage insurance may not be. (Consult a tax advisor about your situation.)

You can cancel PMI

You don’t have to pay PMI forever. You can ask to have it canceled after you have built up 20 percent equity in your home. This means if your home is worth $200,000, you have at least $40,000 in equity in your home. And you don’t have to pay down your mortgage to build equity, either. If you have made significant home improvements or your property has appreciated significantly in value, you may be able to cancel private mortgage insurance even earlier. The lender may require you to pay for an appraiser to establish your home’s value in today’s market.

If you signed your mortgage on or after July 29, 1999, a federal law requires lenders to automatically – with a few exceptions – cancel your private mortgage insurance once you have paid 22 percent of the principal based on the original loan amount.

Lenders do have some leeway to refuse to cancel your PMI if you are not current on your payments, if there are liens against the property or if you have an exceptional amount of debt based on your income.

Some people avoid private mortgage insurance by getting a small home equity loan to “piggyback” on the mortgage. The piggyback loan pays for the rest of the down payment so the buyer is able to put 20 percent down. These loans carry a higher interest rate than the mortgage, but the interest may be tax-deductible. A financial advisor can help you figure out how to determine if private mortgage insurance is the best way for you to buy a home.

Private Mortgage Insurance

RE.com Tips & Tools — Thu, 15 Feb 2007 20:17:00 GMT

Q: I've saved $20,000 to put toward the purchase of a home. The home I'm interested in buying, however, costs $200,000 and I've been told that unless I can come up with a larger down payment, I'll need to take out private mortgage insurance. What is this and how does it work?

A: As a general rule, lenders require those who take out a mortgage on a home with a down payment of less than 20 percent of the home’s appraised value or sale price to obtain private mortgage insurance.

This protects the lender in the event that you default on your loan by ensuring that the outstanding balance will be paid off.

The cost of private mortgage insurance tends to vary depending on the size of your down payment, the type of mortgage and the amount of coverage your lender requires. In general, it’s about one-half of one percent of the value of the loan, according to the Mortgage Bankers Association of America. If you were to take out a $180,000 mortgage, it would cost around $180,000 multiplied by .005, or $900 a year. Divided by 12, this would add $75 a month to the cost of your mortgage.

The advantage of private mortgage insurance is that it enables you to purchase a home with a lower down payment than would otherwise be possible. It also provides lenders the security of knowing the money they loan is not at risk.

Most lenders will require you to keep private mortgage insurance until you achieve 20 percent equity in your home. It is up to you to keep track of when you reach this point and to notify the lender to discontinue the insurance. The lender could require a new appraisal that you may have to pay for as well. In some cases, if you fall into a high-risk category due to factors such as poor credit history or a high debt-to-income ratio, a lender may require you to keep the insurance until you achieve up to 50 percent equity in your home.

It may be possible to finance the private mortgage insurance if you are willing to accept a higher interest rate on your mortgage, instead of paying the premium as a separate monthly fee. The advantage of this option is that mortgage interest is deductible, whereas mortgage insurance premiums are not.

For more information about private mortgage insurance, including how to cancel a policy, visit the web site for the Mortgage Insurance Companies of America.

The Second Trust (Piggyback) Loan

RE.com Tips & Tools — Thu, 15 Feb 2007 19:39:00 GMT

Can I Avoid PMI?

Even if you cannot afford a 20% down payment on your house, you may still be able to cross the threshold of your dream home. Many lenders will allow smaller down payments - as little as 5% in some cases. With smaller down payment loans, however, borrowers are usually required to carry private mortgage insurance (PMI) which means:

you may be required to make an initial premium payment; and
pay additional monthly fees on top of your regular mortgage payment

If these extra charges don’t sound appealing to you, you may consider a second trust loan or "Piggyback Loan."

What is a Piggyback Loan?

A piggyback loan is a combination of two loans that close at the same time to purchase a home. The most common piggyback loan is an 80/10/10.

80 percent of the home’s value is financed through a first mortgage.
The remaining 20 percent is equally divided between a second, piggyback loan and the down payment.

Example

Purchase Price	1st Mortgage Amount	Down Payment	Piggyback Loan Amount
$200,000	$160,000 (80%)	$20,000 (10%)	$20,000 (10%)

Piggyback Loans vs. PMI

As with every financial option, there are pros and cons associated with both piggyback loans and PMI. Choosing the option that’s best for you depends on your individual financial situation and your state’s regulations.

TIP: Before deciding to select a piggyback loan instead of PMI, you should consult with a financial professional.

Canceling private mortgage insurance

RE.com Tips & Tools — Tue, 16 Jan 2007 20:27:00 GMT

Have you built up a fair bit of equity in your home? You may qualify to cancel private mortgage insurance and save hundreds, or even thousands, of dollars a year.

Chances are, if you put less than 20 percent down when you purchased your home, your mortgage lender required you to take out private mortgage insurance (PMI). This insurance protects the lender in the event that you should default on the loan, and you benefit by being able to take out a mortgage that you might not otherwise have qualified for.

But the cost of paying this extra mortgage premium each month adds up. It’s in your best interest to cancel it as soon as possible. So, how do you go about it?

What PMI costs

The cost of PMI varies, but it’s generally about one-half of 1 percent of the purchase price of a home. So, if your home cost $300,000, that would work out to around $1,500 a year. Typically, this amount would be divided by 12 and included in your monthly mortgage payment. In this case, it would add an extra $125 a month onto the cost of your payment.

When can you cancel?

According to the provisions of the Homeowner’s Protection Act (HPA) of 1998, lenders are obliged to cancel PMI (on mortgages signed on or after July 29, 1999) when you reach 22 percent equity in your home, provided your payments are current. You also have the right to request cancellation of PMI when you have paid down your mortgage to the point where you reach 20 percent equity in your home. In order to qualify, your lender will likely expect you to have a good payment history, meaning that you have not been 30 days late with your mortgage payment within the past year or 60 days late within the past two years.

Exceptions to the rule

HPA rules do not apply to government-insured VA or FHA loans. VA loans do not require PMI, and FHA loans are covered by FHA insurance that lasts for the life of the loan. Fannie Mae and Freddie Mac loans are also subject to different regulations. In the case of these loans, it is up to the homeowner to request cancellation of PMI, and termination is permitted after two years if the balance of the loan is no more than 75 percent of a home’s current appraised value, and after five years if it is no more than 80 percent. These agencies also require that you have a good payment history.

How to cancel PMI

Contact your lender or mortgage provider, or call Fannie Mae or Freddie Mac, to find out whether you qualify to cancel PMI and how to proceed. If you closed your mortgage before July 29, 1999, you can contact your state consumer protection agency to find out if your state has any laws that apply to early termination or cancellation of PMI. If you have built up enough equity, you may want to consider refinancing your mortgage to get rid of PMI. In some cases, refinancing may also enable you to get better terms on your loan.

Do I have to have private mortgage insurance

RE.com Tips & Tools — Tue, 16 Jan 2007 20:24:00 GMT

Depending on your situation, there may be alternatives to expensive PMI.

Private mortgage insurance (PMI) adds hundreds or even thousands of dollars a year to mortgage payments, so it’s logical to wonder whether there’s any way to avoid paying it.

The best way to avoid PMI is to make a down payment of 20 percent on a home loan. Private mortgage insurance helps the lender recover its money if the buyer defaults on the loan. When lenders have been paid 20 percent of a home’s original value, they are more likely to recoup their costs if they have to foreclose.

Federally insured loans, such as Veterans Administration (VA) loans or Federal Housing Authority (FHA) loans, also don’t require private mortgage insurance. There are maximums on the amount of money buyers can borrow, depending on the local market. And not everyone qualifies for VA or FHA loans.

But if you can not make a 20 percent down payment or will not qualify for a federally insured loan, you probably will have to get private mortgage insurance.

How it works

Your lender will obtain the insurance for you, and you can roll the private mortgage insurance payments into your monthly mortgage payments.

You can ask to have PMI canceled once you have 20 percent equity in the home -- in other words, when you have paid down 20 percent of the purchase price of the home. Private mortgage insurance should automatically be canceled once you have achieved 22 percent equity.

Avoid PMI with a piggyback loan

There is another way to avoid private mortgage insurance -- a piggyback loan. Here’s how it works: When you get your mortgage loan, you also take out a second, smaller loan for the difference between your down payment and a 20 percent down payment. You use the piggyback loan to pay the rest of your down payment.

Also called 80-10-10 loans, piggyback loans are becoming more popular. Even though you are paying off two loans, the monthly payment for the piggyback loan could be smaller than monthly payments for private mortgage insurance. In addition, the interest on the piggyback loan may be tax-deductible. Private mortgage insurance payments are not .

Talk to a qualified financial specialist to see what option might be best for you.

Cancellation of private mortgage insurance

RE.com Tips & Tools — Tue, 16 Jan 2007 20:22:00 GMT

Federal law may save you hundreds of dollars each year

If you put less than 20 percent down on a home mortgage, lenders often require you to have Private Mortgage Insurance (PMI). PMI protects the lender if you default on the loan. 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 refinance 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. Your PMI also can be canceled, when you request - with certain exceptions - when you reach 20 percent equity in your home based on the original property value, if your mortgage payments are current.

One exception is if your loan is "high-risk." 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 these loans, your PMI may continue. Ask your lender or mortgage servicer (a company that collects your payments) for more information about these requirements.

If you signed your mortgage before July 29, 1999, you can ask to have the PMI canceled once you exceed 20 percent equity in your home. But federal law does not require your lender or mortgage servicer to cancel the insurance.

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 loan. Check your annual escrow account statement or call your lender to find out exactly how much PMI is costing you each year.

Additional provisions in the law

New borrowers covered by the law must be told - at closing and once a year - about PMI termination and cancellation.
Mortgage servicers must provide a telephone number for all their mortgage borrowers to call for information about termination and cancellation of PMI.
Even though the law’s termination and cancellation rights do not cover loans that were signed before July 29, 1999, or loans with lender-paid PMI signed on any date, lenders or mortgage servicers must tell borrowers about the termination or cancellation rights they may otherwise have under those loans (such as rights established by the contract or state law).

Next Steps

Some states may 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 state’s rules. Fannie Mae and Freddie Mac, which buy home mortgages from lenders, also may have guidelines affecting termination or cancellation of PMI on home mortgages signed before July 29, 1999. Check with your lender or mortgage servicer, or call Fannie Mae or Freddie Mac, for more information.

Contact your lender or mortgage servicer to learn whether you’re paying PMI. If you are, ask how and when it can be terminated or canceled.

“Cancellation of Private Mortgage Insurance: Federal Law May Save You Hundreds of Dollars Each Year” reprinted from www.ftc.gov

How can I cancel private mortgage insurance?

RE.com Tips & Tools — Tue, 16 Jan 2007 20:21:00 GMT

You can do it yourself once you have enough equity, or wait for the lender to do it for you.

There are two primary ways to cancel private mortgage insurance (PMI), but both are dependent on your having paid at least 20 percent of the principal on your loan. That’s because lenders worry they won’t recoup their investment if a lender defaults before reaching that repayment threshold.

First, you can ask your lender to cancel your private mortgage insurance after the total of your down payment and your principal pay-down equals 20 percent of the original loan. If your mortgage payments are current and your financial situation is sound, you have a good chance of success.

The second major way to cancel private mortgage insurance is to wait until you have 22 percent equity in your home, based on your home’s value at the time you took out the loan. If you reach this point, your lender and mortgage insurer are required to automatically cancel your private mortgage insurance, under the Homeowners Protection Act of 1998.

One big catch: your mortgage payments have to be current. And, the federal law on canceling private mortgage insurance only applies to mortgages that closed on or after July 29, 1999, although your state might have additional protections.

You also can ask your lender to cancel your private mortgage insurance earlier if the value of your home has increased. For example, if you made a 10 percent down payment on your home, then renovated the kitchen and increased the home’s value by 10 percent, you may have a case for early private mortgage insurance cancellation. Your lender may ask you to pay for an approved appraiser to confirm the home’s new value.

Legally, mortgage servicers have to provide a number for borrowers to call to inquire about private mortgage insurance rules. Also, you can always call your lender or mortgage servicer to ask about canceling private mortgage insurance once you hit the 20 percent threshold. The phone number should be on your monthly mortgage statement.

The sooner you take that step, the sooner you can start saving the money you have been paying for PMI.

What to think about when you're buying a home

RE.com Tips & Tools — Fri, 12 Jan 2007 20:26:00 GMT

Answer these questions and be sure you're making sound financial decisions.

Buying a home is a serious financial undertaking and it is important that you know what you’re getting yourself into. Ask yourself some important questions so that you can make the smartest financial move.

How much can I afford?

There is not a set formula for how much you should spend on a home. Many experts indicate that you shouldn’t spend more than two and half times your total yearly income. Others suggest that no more than thirty-five percent of your total monthly income be spent on your living expenses, including utilities. Talk to your lender and devise a reasonable monthly budget so that you can determine for yourself how much you can truly afford to spend.

How large should my down payment be?

First, you will need to find out the minimum down payment required by your lender. If your lender does not require a 20 percent down payment you will probably be required to pay private mortgage insurance (PMI) if you put less than 20 percent down. There are some options you can look into, such as a piggyback loan (also known as an 80-10-10 loan), that can be used to avoid paying PMI even if you don’t have a large down payment. Also keep in mind that the larger your down payment is, the lower your monthly payment will be. Think about your savings, your budget, your lender’s requirements and your loan options when making a decision about your down payment.

What kind of mortgage should I get?

It is important that you educate yourself on the different kinds of mortgage products before you buy a home. Different products have different terms, requirements, and interest rates. For instance, a fixed-rate mortgage keeps a constant interest rate for the life of the loan, while an adjustable-rate mortgage (ARM), has an interest rate that changes periodically according to general interest rates. When it comes to buying a home, do your research and make sure you’re getting the best mortgage you can.