Private Mortgage Insurance! Many curse the very name!
Without it, however, most low-down-payment home buyers might never get a chance to own.
If you're like thousands of homeowners across the US who put less than 20% down payment on your home, there is a good chance part of your monthly payment includes Private Mortgage Insurance, commonly referred to by its initials - PMI. Insurance is exactly what it is - for the LENDER, that is. It covers the lender in case of Borrower Default, on high Loan To Value Loans.
The Insurance Premium? Although the Insurance protects the lender, the premium is paid in full by the borrower. Depending on the price of your home, and the original Loan to Value, this premium can run into hundreds of dollars each month.
Further, on some types of Government Backed Loans - including low-down-payment FHA and VA Loans, borrowers may be forced to also pay a lump-sum insurance premium up front, in addition to the monthly charge. The upfront fee for FHA Mortgages, with only 3.5% down payment initially, is currently 1.75% of the initial loan amount, added to the principal amount of the new loan or re-finance.
Our Chicago Area Mortgage Professionals who partner with our Chicago Real Estate Team estimate the Monthly PMI for a Conventional Loan with less than 10% Down Payment can run 1.5% of the Initial Loan Amount, depending on your credit score. The 1.5% is based on the original loan amount, and divided monthly.
For example, a borrower who takes out a 5% Down Loan on a $200,000 home would be financing $190,000. At today's market interest rate of an attractive 3.75%, the borrower's monthly Principal & Interest would payment would be $879.93. However, the Monthly Private Mortgage Insurance Premium would add an additional $237.50 to each payment. not including Real Estate Taxes, to $1,117.43 - over 21% of the Total Monthly Mortgage Payment!
FHA Borrowers who borrow that $190,000, assuming the same 5% Down Payment, today would pay 1.25% of the original loan amount, divided each month. In addition, under current rules, these borrowers would also have to currently fork over an up-front Mortgage Insurance Premium Fee of 1.75% of the Loan Amount. This example FHA Borrower would actually be borrowing $193,325, adding the up-front fee to the mortgage balance. Their monthly payment, using the same 3.75% interest rate, would be $895.56 for Principal and Interest, plus an additional $207.63 for Mortgage Insurance. The total monthly payment - $1,103.19!
Qualified US Veterans, obtaining VA Insured Financing, might have to pay an even higher up front Mortgage Insurance Premium - between 2.4% and 3.3%, again rolled into the loan. However, Qualified Veterans may borrow 100% of the Purchase Price of their new home, and would not have to pay a Monthly Mortgage Insurance Premium.
Keep in mind those up-front Mortgage Insurance Premiums take a sizable chunk out of a borrower's home equity. In these days of low annual equity growth, that equity bite will come back to roost, in the form of a lower return-on-sale down the road, when the house is eventually sold.
Further, for most owner-occupants, neither the up-front nor the monthly PMI is Tax Deductible under current IRS Tax Codes. There is no tax deduction for PMI Payments, as there would be for Qualified Mortgage Interest each year.
Back in the heady days of the Real Estate Boom, here in Chicago and across the US, paying PMI on high-leverage loans appeared less troublesome. Many properties in Chicago Neighborhoods and Suburbs enjoyed 3-5% annual value growth in the late 1990's and early 2000's. That growth actually turned into a loss, in many Chicago Neighborhoods, beginning in 2007.
Is there a way to eliminate monthly PMI Payments? Actually, according to Scott J. Wilson, as written in his column in the December 16th Edition of the Los Angeles Times, and Reprinted in the Chicago Tribune, there are several ways.
According to the Homeowners Protection Act, which applies to all Mortgage Loans originated since July 29, 1999, lenders are required to automatically terminate PMI Premiums when the Principal Balance falls to 78% of the ORIGINAL Loan Amount, based solely on monthly payments made against principal. Some homeowners add to their Principal Payments each month, with the goal of not only eliminating PMI as quickly as possible, but also reducing the total term of the mortgage loan. Depending on the amount of each monthly over payment, a loan term can decrease by five years, or more.
Borrowers who feel they have built up a 20% Equity in their home - either through scheduled or additional principal payments, property appreciation, or both, may ask the Lender to remove their PMI at that time. Often, a Full Appraisal is then required to substantiate market value, regular monthly payments have been made consistently, and on-time, and their is not subordinate financing, or Home Equity Lines of Credit (HELOC) Loans against the property.
These days, PMI Elimination due to Property Appreciation takes considerably longer, as annual rates of appreciation, for many properties, have slowed, or, in some cases, disappeared altogether (for the time being, anyway).
On some loans, PMI must be removed if a borrower makes consistent on-time payments halfway through the loan term, regardless of appreciation on the property. Individual Lenders and language in mortgage documents often spell this out.
The elimination of Mortgage Insurance often does not apply to FHA or VA Loans. Often, the only way to eliminate Mortgage Insurance is to refinance out of these loans, into a Conventional Mortgage. However, any Loan Refinance is not without Title Expenses, as well as Administrative and Processing Fees. These fees will offset likely monthly savings associated with removing PMI, especially if the Borrower subsequently sells quickly after they re-fi.
Confusing? Of course!
But, usually, elimination of PMI or FHA/VA Mortgage Insurance Premiums result in considerable savings in the long run, especially when paired with the current low interest rate climate.
Call if you have questions, and are unsure how to proceed. Our Team, and other folks we know, are here to help!
Also see our post today via BlogChicagoHomes.com.
DEAN MOSS & DEAN'S TEAM CHICAGO
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