| If you put a down-payment of less
than 20% when you bought your home, chances are good that you had to
purchase private mortgage insurance, or PMI, in order to qualify for
your loan. A mortgage insurance policy protects the bank in the event
they are forced to repossess your house and sell it at a loss. As with
most other types of insurance, you pay a monthly premium on top of your
monthly mortgage payment for this policy. A mortgage insurance policy
provides the means for purchasing a house you may otherwise be unable to
afford, due to a limited down payment.
The good news is, PMI makes it possible
for a homebuyer to obtain a mortgage with a down payment as low as 5%
and for low-to-moderate income homebuyers as low as 3%. PMI may be also
required when buying a second home or refinancing an existing mortgage
with cash out. Mortgage insurance protects the mortgage lender against
financial loss if a borrower defaults.
Low-down-payment mortgages are
becoming more popular. Mortgage insurance allows borrowers to purchase a
more expensive home than they might otherwise be able to afford. With
lower down-payment, you might retain more funds for home furnishings or
remodeling, buying a car, or other investments.
The mortgage insurance premium is
based on loan to value ratio, type of loan, and amount of coverage
required by the lender. The good faith estimate of closing costs
provides the estimated premium and monthly cost for the PMI coverage.
It may be possible to cancel PMI at some point, such as when your loan
balance is reduced to a certain amount - below 75% to 80% of the
property value. The law in certain states requires that mortgage
insurance be cancelled under some circumstances. But because of the wide
variation in lender, investor and state requirements, it is necessary to
find out the specific requirements for cancellation before you commit to
paying for mortgage insurance.
Federal legislation enacted in 1999 made it a little bit easier to rid
yourself of your monthly mortgage insurance premium. It requires lenders
to automatically eliminate your mortgage insurance once you own 22% of
your personal residence. Unfortunately the 22% equity is based on the
value of your loan compared to the home's original purchase price so the
lender does not take into account the appreciation of your home - just
the gradual pay-down of your mortgage. However, some lenders will
consider your home's appreciation in deciding whether or not PMI is
still required, so it doesn't hurt to ask.
Mortgage insurance should not be
confused with mortgage life insurance, which is designed to pay off a
mortgage in the event of the borrower's death.
Material discussed is meant
for general illustration and/or informational purposes only and it is
not to be construed as tax, legal, or investment advice. Although the
information has been gathered from sources believed to be reliable,
please note that individual situations can vary therefore, the
information should be relied upon when coordinated with individual
professional advice. Past performance is no guarantee of future results.
Diversification does not ensure against loss. Source: Financial Visions,
Inc. |
