Private Mortgage Insurance
Many Americans dream of owning their property rather than having to rent, but scraping together the money for the down payment is far from easy, even for those still living at home with mom and dad.
However, for those who are finding it tough to save up enough dollars, there is an alternative route but it will mean an additional monthly payment.
Private mortgage insurance is a type of additional monthly payment designed to provide the lender with some protection if less than 20% of the purchase price is paid at the point of sale. Although it is called insurance, PMI is more like a savings plan which the lender can only dip into if the borrower defaults to the extent that they are facing foreclosure.
Adding PMI to your mortgage means that it is possible to purchase a property with just a 3% down payment – without PMI lenders will insist on at least 20%.
PMI does not have to be paid indefinitely, as unlike insurance, the premium is not simply an amount payable for extra risk, but actually held separately in an escrow account. PMI ceases being payable when the amount accumulated in the fund reaches 20% of the purchase price, or the property holds 20% equity, either due to a rise in property prices or by renovations carried out.
If a home loan is refinances for any reason, the borrower is entitled to receive a proportion of his PMI back – typically in the region of between 33% and 50%.
Opting for PMI means that individuals who would otherwise be unable to obtain a mortgage can own their home, but it does mean an additional premium is payable and in tough economic times this can be difficult. PMI is typically calculated as a percentage of the mortgage payment and is usually around half a percent. This means that the PMI premium can be as little as $50 each month or run into hundreds if the amount borrowed is significant.
It is possible to negotiate with some lenders to pay a higher interest rate instead of taking out PMI – some people prefer this option because PMI is not tax deductible. However, when calculating the best option remember that PMI has an end date whereas a higher mortgage deal may run for much longer and be more expensive to switch to another provider.
If you opt for PMI it is important to keep track of when you think you have hit 20% because the lender has no legal obligation to inform you until the balance reaches 22%, under the Homeowners Protection Act 1998. It will usually be necessary to get an independent valuation of your property to confirm this is the case before the lender agrees to cancel it.
At this point you may want to consider switching mortgage provider, as with 20% equity in your property, there will be more options open. Rather than trawl through the market yourself, using a comparison website such as moneysupermarket.com can give you an idea of what deals are around without having to spend painstaking hours searching through each company yourself.
