My blogs will tend toward educational. Hopefully not boring. I would love to provide an interesting introspective on how we got to where we are in the sub-prime mortgage debacle. But that is history. Your concerns of how do you become a home buyer, or if you are a home seller- how do you make your home more saleable, may be more appropriate to address today. There’s always time for history. Stay tuned, as I will write a bit about the JUMBO mortgage morass in my next blog.
It’s a strange new world. The mortgage market is all roiled up and that creates a great deal of insecurity. Let’s discuss Private Mortgage Insurance (PMI) today. I feel that it is coming back in vogue and will allow the real estate and mortgage industries to continue to function in a sane and rational manner.
As a homebuyer many people do not have enough money to put down on a home, typical requirements range from Zero to 5-10-20% down. Back in the old days, pre sub-prime, lack of a down payment could be overcome by purchasing mortgage insurance (for loan amounts greater than 80% loan to value) or getting an FHA backed mortgage.
PMI covers the lender in the case of foreclosure. In effect, mortgage insurance provides what the equity of a higher down payment would provide to cover a lender's losses in the unfortunate event of foreclosure. The cost of PMI increases as your down payment decreases. Example: The cost of PMI on a 10% down payment is less than the cost of PMI on a 5% down payment. Your PMI premium is normally added to your monthly mortgage payment.
A foreclosed property carries with it large losses, back mortgage payments, cost of foreclosure, repairs, holding period, etc. This may run to 25% or more of property value. Trust me, the lender does not want your property; they are not in that business. So, PMI basically pays for the losses incurred above a certain level. That’s great! The lender will now make the loan because they can plan on their loan losses. The risk of uncertainty is limited.
The problem with PMI is that it can cost as much as 1%, like adding 1% to your interest rate and back in the old days that could not be removed without refinancing your mortgage. That’s expensive.
The mortgage industry created a way around the universally disliked PMI. They created mortgages to 80% (at a low interest rate) and added on a second mortgage up to 100%, at higher interest rates- but that additional percentage wasn’t attached to the 80% mortgage.
Today there are a limited number of second mortgages, but that likely will change with new regulations. Today you can still get a high LTV mortgage, except you will probably be paying PMI to cover the lenders- and mortgage backed security buyers- increased risk of default. The nice thing for the consumer is PMI is now tax deductible, like interest and that takes away some of the pain. It can also be removed at some point.
Some lenders may require that you pay PMI for a number of years before making application for its removal. Your loan may have to be paid off to 80% of its original value before removal.
The Homeowners Protection Act of 1998 - For home mortgages signed on or after July 29, 1999, your PMI must - with certain exceptions - be terminated automatically when you reach 22 percent equity in your home based on the original property value, if your mortgage payments are current. Restrictions do apply.
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