In mortgage industry, the term Private Mortgage Insurance is quite
familiar to all. Potential borrowers seek help from a financial firm to own
their dream home. While getting that help, people facing cash problem might
have to bear the extra burden of Private mortgage insurance policy. Let us discuss
the ins & outs of this policy & try to learn the benefits from the
point of view of both borrowers & lenders.
What is PMI
Private mortgage Insurance or PMI is
basically treated as a risk oriented insurance policy or a risk-management
instrument. In case of a mortgage loan , this policy saves the interest of
lender if the borrower fails to make the due payments.
Why lenders prefer PMI
When a person applies for home loan, the
lender first evaluates the financial condition of that person very
specifically. If the person can’t afford the downpayment for at least 20% or
do not have enough equity, then he is required to pay PMI along with the
monthly payments. Usually, lenders ask borrowers to buy PMI for loans that are
more than 80% of LTV or loan-to-value ratio.
The risk for the lender becomes greater when
the percentage of the downpayment reduces. PMI allows the borrower to pay the
downpayment as low as 3% and as high as 19.99%.
Homebuyers with low cash in hand will be benefited by this process as they
don’t have to gather a huge amount for obtaining the mortgage. PMI can be paid
monthly or at closing (lender specific) till the home equity touches the risk
free level.
Despite of the easy obtainable facility,
borrower must also know some facts. They are paying a policy premium (PMI)
which offers zero protection to them. This policy is mainly beneficial for the
lenders as it is protecting the lender’s investment , not the property.
Types of mortgage insurance (MI) & who
needs it
Home buyers with less than 20%
downpayment in hand are required to purchase PMI.
There are the types of MI -:
a) Bought from Government –
MI purchased from government & specifically designed for special loans like
Federal Housing Administration (FHA), Veterans Administration (VA)
etc.
b) Bought from private sectors –
MI purchased from private sectors is called PMI. Typically PMI is meant for
conventional loans only.
c) Lender paid –
Mortgage insurance paid by the lender is called Lender Paid Mortgage
Insurance(LPMI). Lender added up the cost of MI with interest rate. This is
tax-deductible as it is financed by lender through interest payments.
Depending on the payment frequency, MI also
can be categorized into the following segments :
a) Annual – Policy premium
can be paid once a year. It can also be paid at closing only in 1′st year of
the loan term.
b) Monthly –
Generally the premium is payable in monthly basis. Upfront cost is lower but
the monthly premiums are comparatively higher than others.
c) Single-premium –
In this case, 3% to 5% of the loan amount is payable at
closing. Policy must be remain in force till the loan is refinanced or equity
reaches to 78% of the loan amount. Refund will be made for unused premiums.
The cost & payment method of PMI
The cost of PMI depends upon various
factors. Notably, The amount of the loan is the main factor. The higher it is,
the premium will also be high. The downpayment amount & credit score play a
significant role in PMI cost determination. The cost increases gradually as
both the said factors are lowered. Fixed rate mortgage has lower cost rather
than adjustable rate mortgage. We can list up the factors as given below :
1)Credit score
2)Type of the property (primary, second or investment property)
3)Downpayment size
4)Term of the loan
5)Loan-to-value ratio(LTV)
6)Loan type (fixed or adjustable)
7)Loan amount
8)Lender’s preference of policy cover
2)Type of the property (primary, second or investment property)
3)Downpayment size
4)Term of the loan
5)Loan-to-value ratio(LTV)
6)Loan type (fixed or adjustable)
7)Loan amount
8)Lender’s preference of policy cover
Most homebuyers add up PMI premiums with
monthly mortgage payments. The lender then pays the premium from the escrow
account.
Cancellation of PMI
After making the monthly payments on time,
when the equity value reaches 22% , the borrower can stop paying PMI. The
lender must be notified about this along with a proof. An independent appraiser
can be hired to get the report. At the time of this process, it is required to
have the payment history that is void of 30 days/60 days delinquencies within
1year/2year of the cancellation request.
How to avoid PMI
Considering different aspects of PMI, the
borrower who don’t like to obtain the option may choose some other steps to
avoid it. These alternatives are :
· Look out
for the VA loan option if you are a veteran. VA loans do not come up with PMI.
· Get help
from family members like parents & submit 20% or more as downpayment.
· Choose
to pay higher rate of interest. The excess amount from the monthly payment will
be divided between the planned term of occupancy.
· Look out
for special offers from the banks. These offers may be available to the special
professional persons like doctors, teachers or lawyers.
· Choose
combination loan that consists of first mortgage 80%, second mortgage 10% &
down payment as low as 10%.
The PMI has its own unique advantages too.
PMI helps to obtain mortgage with lower downpayment and this is it’s primary
advantage. Lenders & insurers have flexible loan plans for local
communities which is obtainable to the low income people. Lenders &
insurers provide consultation which helps the new home buyers to predict the
possible monthly payments. Aside from this, PMI also have tax savings
opportunity on the annual tax returns. Easier cancellation process gives the
chance to build co-ordination between borrower & the lender. Either of the
two parties can inform the other about the increasing home equity.
After considering the above given advantages
PMI has to offer, the prospective home buyer can find a breathing space in this
competitive mortgage market.
Best Regards,
Eitan Shafshak
Mortgage Loan
Officer
Tel: 702-998-9746
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