Wednesday, October 29, 2008

PMI – Private Mortgage Insurance Basics

Article By: Republic Mortgage Insurance Company


Buying Your Home Sooner With A Low Down Payment

Private Mortgage Insurance (PMI, or Private MI) helps you buy a home sooner and with less money toward the down payment. For many qualified borrowers, as little as 3 percent or less of the home’s value is all that is needed to secure a loan, compared to the traditional 20 percent usually required.

With the high price of homes in many markets across the country, that 20 percent down payment is nearly impossible for most first-time home buyers. Making homeownership a reality sooner, as much as ten years sooner for most borrowers, is one reason why Private MI is today’s smart choice. Indeed, Private MI has helped more than 25 million families buy their homes with the type of loan that best suits their needs.


Financing Your Home With Less Risk, Lower Monthly Payments and Tax Deductible Premiums

Private MI is a fixed-fee, predictable monthly payment. Compared with other financing options, PrivateMI is often more affordable, both as a monthly payment and over the life of the loan. Private MI is there only as long as you need it; when you’ve built 20 percent equity in your home, mortgage insurance can be canceled. By federal law, your lender will annually remind you of your right to request Private MI cancellation and explain how to do it once you are eligible. Your lender will automatically cancel Private MI when your mortgage balance is 75-78 percent of the home’s original value. For many borrowers, Private MI premiums are tax deductible in 2008.


Benefits to You

Private MI offers home buyers more choices and many benefits:

1. If you are a first-time buyer, Private MI helps you get over the biggest hurdle to homeownership – coming up with the traditional 20 percent down payment. You can buy a house, and start building home equity, years sooner with Private MI.

2. Private MI premiums are now tax deductible for many borrowers who purchase or refinance a home in 2008. Families with a household income of $100,000 or less will be able to deduct the full premium cost of Private MI in 2008, while families earning up to $109,000 can qualify for a reduced deduction. Consult your tax preparer for more information on the new law (Enacted in 2007 approximately).

3. If you are a move-up buyer and have enough income, Private MI allows you to consider a wider range of homes. If you have $15,000 in savings or in equity in your current house and make a 20 percent down payment, you can buy a $75,000 home. However, with 10 percent down and a loan insured by Private MI, you can buy a $150,000 home. With 5 percent down and a loan insured by Private MI, you can buy a $300,000 home.

4. Both first-time and move-up buyers can benefit by putting less money down and keeping cash for additional investments, such as eliminating debt, making home improvements or paying for a college education.

5. Private MI is a smart choice because it’s cancelable once you’ve built 20 percent equity in your home and have a track record of on-time mortgage payments. Simply put, Private MI is there only as long as you need it.

6. With interest rates increasing, a single loan with Private MI offers a more predictable and stable financing option to home buyers than piggyback mortgages which combine two loans.


Options to Fit Your Needs

Private MI is available on a wide variety of loans and loan amounts. Your lender can help you determine which premium plan is right for you and will make all of the arrangements for obtaining insurance from the Private MI Company.

Lenders typically pass the costs of lending money on to borrowers, and Private MI is one of those costs. Lender-paid policies are also available, but they result in a higher interest rate on the mortgage, which is also tax deductible.

The cost of Private MI depends on several factors: the size of your down payment, the type of mortgage you are getting, and the amount of coverage the lender or investor requires on your loan. Ask your lender about premium costs for your loan.
Private MI Companies have created a range of premium options to meet your needs:

1. Monthly premium: This is pay-as-you-go insurance. With this plan, your Private MI payment is folded into your monthly mortgage payment. It is a good choice if you want to minimize your closing costs.

2. Single premium: With this plan, you finance a one-time premium as part of your loan. It is ideal if you want to keep both your closing costs and your monthly mortgage payments at a minimum.

3. Annual premium: This plan allows you to pay an upfront premium, which can be financed with an annual renewal.

4. Lender-paid mortgage insurance: With this plan, the lender pays the Private MI premium. You pay a higher interest rate for the life of the loan to cover the lender’s higher cost of loaning you money, but the interest payments are tax deductible. This plan reduces closing costs and monthly payments for many borrowers. However, it cannot be canceled.


Help for Low-Income Home Buyers

If you are a low income home buyer, you may be eligible for programs that include Private MI and therefore make it possible to buy a house with a down payment of 3 percent or less. The flexibility of these programs helps many people achieve homeownership and begin to build equity sooner.

Features of these programs often include:

1. Tailoring loans to community needs and working with local community groups;

2. Education components that help you learn about the home buying process and provide counseling to help you keep your home if you run into financial difficulties; and,

3. An array of realistic options in such areas as down payment, Private MI premiums and credit verification. Proof of on-time rent and utility payments, for example, can substitute for more traditional credit history.

Your lender can help you determine whether you qualify for an affordable housing program with Private MI.


Helping You Buy and Keep Your Home

While a loan with Private MI is more predictable and often less expensive than other types of financing methods, anyone can run into financial difficulty. Private MI companies understand and make an effort to help you hold onto your home if you need help. Private MI companies know that their success rests on your success, and they work with lenders to help you minimize the risk of losing your home if you have problems making mortgage payments.

If you lose your job, get divorced or encounter other financial challenges, Private MI companies will try to help you find ways to make your mortgage payment, protect your credit and your investment in your home. Private MI companies will work with lenders to restructure payments and terms, forbear from collecting the loan for a period of time, and will even loan their own money to borrowers. All of this adds up to one thing: Private MI means lower risk for borrowers.


Canceling Mortgage Insurance

Unlike many other financing options, Private MI is there only as long as you need it, and is cancelable when it is no longer needed. A federal law, covering loans closed on or after July 29, 1999, includes two basic consumer protections:

1. Your right to request Private MI cancellation when your mortgage balance has reached 80 percent of the original value of the house. Your lender must inform you both at the loan closing and annually thereafter about the right to request cancellation and how to cancel.

2. Automatic cancellation of Private MI by your lender when the mortgage balance reaches 78 percent of the home’s original value.

Even if you closed on your mortgage prior to July 29, 1999 Private MI generally is cancelable once you have built up enough equity and are up-to-date on your mortgage payments.

It is important to understand that the Private MI Company does not make the decision to cancel insurance, and you should contact the company you send your mortgage payment to for details on your loan. More information about cancelling Private MI can be found at www.privatemi.com.


What Mortgage Insurance Is NOT

Private MI is sometimes confused with other types of insurance associated with homeownership. Private MI is not mortgage life insurance, which pays off a mortgage if you die or become disabled. It is not homeowners insurance, which protects you from loss from theft, fire or other disaster. Private MI protects the lender and investor, not the borrower, from loss. But it also helps minimize the risk of losing your home if you run into difficulty making your mortgage payments.

Private MI also is not the same as the government mortgage insurance program run by the Federal Housing Administration. Private MI is available on a wider variety of loan products and loan amounts than FHA insurance, and can be canceled.

For more information on Mortgage Insurance, contact your Summit Mortgage Representative Today!

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