Wednesday, April 23, 2008

PMI, or Private Mortgage Insurance

As a home buyer in Saline, you want to know everything about the process before talking with anyone about your plans. That’s completely understandable.

Toward that end, I’d like to address the topic of Private Mortgage Insurance, or PMI. You’ll be paying PMI, in one way or another, whenever you put less than 20% downpayment on your Saline home purchase. If you’re a first-time homebuyer in Saline, coming up with that 20% downpayment may be a real struggle, so it’s especially important to understand PMI.

From Wikipedia, the free encyclopedia: Lenders mortgage insurance (LMI), also known as Private mortgage insurance (PMI) in the US, is insurance payable to a lender or trustee for a pool of securities that may be required when taking out a mortgage loan. It is insurance to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.

Another way to put it is that PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home's value.

PMI plays an important role in the mortgage industry by protecting a lender against loss if you default on a loan, and by enabling borrowers with less cash (like a first-time buyer) to have greater access to homeownership. With PMI, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment. This means that you can buy a home sooner without waiting years to accumulate a large down payment.

In the past, most lenders honored consumers' requests to drop PMI coverage if their loan balance was paid down to 80 percent of the property value and they had a good payment history. However, consumers were responsible for requesting cancellation and many consumers were not aware of this possibility. Consumers had to keep track of their loan balance to know if they had enough equity and they had to request that the lender discontinue requiring PMI coverage. (As a side note, I track your home’s value for you, and call my clients when it appears that they may be able to drop PMI). In many cases, people failed to make this request even after they became eligible, and they paid unnecessary premiums ranging from $250 to $1,200 per year for several years. With the new law, both consumers and lenders share responsibility for how long PMI coverage is required.

You have the right to request cancellation of PMI when you pay down your mortgage to the point that it equals 80 percent of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less. You also need a good payment history, meaning that you have not been 30 days late with your mortgage payment within a year of your request, or 60 days late within two years. Your lender may require evidence that the value of the property has not declined below its original value and that the property does not have a second mortgage, such as a home equity loan.

Mortgage lenders or servicers must automatically cancel PMI coverage on most loans, once you pay down your mortgage to 78 percent of the value if you are current on your loan. If the loan is delinquent on the date of automatic termination, the lender must terminate the coverage as soon thereafter as the loan becomes current. Lenders must terminate the coverage within 30 days of cancellation or the automatic termination date, and are not permitted to require PMI premiums after this date. Any unearned premiums must be returned to you within 45 days of the cancellation or termination date.

For high risk loans, mortgage lenders or servicers are required to automatically cancel PMI coverage once the mortgage is paid down to 77 percent of the original value of the property, provided you are current on your loan.

If PMI has not been canceled or otherwise terminated, coverage must be removed when the loan reaches the midpoint of the amortization period. On a 30-year loan with 360 monthly payments, for example, the chronological midpoint would occur after 180 payments. This provision also requires that the borrower must be current on the payments required by the terms of the mortgage. Final termination must occur within 30 days of this date.

It’s always best to speak with a lender before beginning your home-shopping experience. Your lender will explain to you all of your options regarding PMI. If you’d like the names of some outstanding local lenders, give me a call or send an e-mail.

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