Home prices are at an all-time low, and if you've been considering owning a home, now may just be the perfect time to buy. But what if you don't have the 20 percent down payment? Private Mortgage Insurance (PMI), or Lenders Mortgage Insurance (LMI), may be your answer to qualifying for a predictable, affordable home payment while keeping your risk low during these tight economic times.
Private Mortgage Insurance - How Does It Work?
Because of the high rate of foreclosures in 2008, PMI may play a greater role in the mortgage industry, because it protects the lender against a loss if the borrower defaults on the loan.
PMI also enables home buyers to pay a smaller down payment, ranging from 3 percent to 5 percent, which offers you the opportunity to get into a home sooner versus saving up the traditional 20 percent of a home's value.
It is also a more affordable alternative to piggy-back loans, which uses a second mortgage on an existing home to make up any needed difference. If you're a first-time home buyer who doesn't own any property, PMI offers you an opportunity to get into a home sooner than later.
Private Mortgage Insurance - What Does It Cost?
PMI rates and payment structures vary from lender to lender. Some may offer a monthly rate of $55 or more with a smaller amount financed. Or some may go as high as $1,500 to $2,000 annually, requiring payment at the time of the loan's closure.
The cost of private mortgage insurance varies considerably based on several factors which include:
- Credit score
- Loan amount
- Loan to Value Ratio (LTV)
- Loan term
- Occupancy (primary, second home, investment property)
- Payment structure (monthly, annual or single)
If payment is required up front, it may be incorporated into the home loan or is paid through a higher mortgage interest rate.
Private Mortgage Insurance - The Benefits
Aside from the main advantage of a lower down payment, PMI offers you some key financial benefits.
Tax deduction - — In 2006 a tax law was passed enabling those making less than $109,000 annually to write off their PMI payments on their tax returns, but only for mortgage contracts issued after December 31, 2006 and before January 1, 2010.
Predictable payments - — PMI premiums are fixed at the time of the loan and are void of large balloon payments, which help you keep your financial commitments.
Low-income programs - — Some lenders and insurers work with local communities to offer flexible programs to help individuals qualify for an affordable housing loan.
Consultation - — Many PMI insurers and lenders provide programs to educate you on the home buying process, and will work with you should you run into financial difficulties, helping you to avoid being part of the foreclosure statistic.
Canceling Your Private Mortgage Insurance Policy
Another law was passed in the late '90s that offered consumers with protection against paying PMI premiums that they didn't need. It requires the lender to notify the borrower when the loan-to-value ratio (LTV) of the home reaches 80%, which is the point where PMI is no longer required. This gives you the opportunity to cancel your PMI policy.
You can get to this point by paying down your principle, having your home rise in value, or having a combination of the two.
At the time of cancellation, you need to have kept a good payment history that is void of 30 day delinquencies within a year of your request, or 60 day delinquencies with two years.
If you do not respond to the notification, the law requires your lender or insurer to automatically cancel your PMI policy when the LTV is reduced to 78 percent.
If you believe that your LTV has reached 80 percent prior to a notification, you can submit proof of LTV through an appraisal of your home's value.
By taking advantage of the benefits PMI has to offer, while working with your mortgage lender and insurance agent, you may just find a silver lining in the current mortgage market.
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