It’s almost impossible to listen to the radio or read a newspaper without encountering an ad for low- or no-down-payment home loans. If you are considering buying a house or condominium, or refinancing your current home, it pays to understand the pros and cons of these high loan-to-value-ratio mortgages.
WHAT IS P.M.I. (PRIVATE MORTGAGE INSURANCE)? Unless you obtain a government-sponsored VA (Veteran’s Administration) or FHA (Federal Housing Administration) home loan for all or most of the market value of your home, you will probably encounter PMI.
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PMI insures conventional mortgage lenders, such as banks, credit unions and mortgage bankers, against foreclosure losses on the mortgage amount exceeding 80 percent of the home’s value.
For example, suppose you buy a $200,000 house or condo for nothing down with a $200,000 PMI mortgage. In addition to your monthly principal and interest mortgage payment, plus property taxes, you will also have to pay a PMI premium. If you default and the lender suffers a foreclosure loss, the PMI insurer will pay the lender any loss exceeding 80 percent of the loan balance. That’s up to $40,000 in this example.
In other words, PMI protects mortgage lenders, not borrowers. But PMI enables “cash challenged” home buyers to purchase homes for which they don’t have a down payment available.
With good income and good credit, home loan borrowers can obtain PMI mortgages for 90 percent, 95 percent, 100 percent and sometimes even 103 percent (including closing costs) of the residence’s purchase price.
MAJOR DRAWBACKS OF P.M.I. But PMI is not free. Although PMI premiums vary, they typically add $50 to several hundred dollars per month to the cost of a home loan, depending on the loan amount and the insurer’s risk.
PMI is underwritten by private insurers specializing in this unique insurance, which is arranged by mortgage lenders for their borrowers.
Another drawback is PMI premiums are not tax deductible like mortgage interest. For several years, PMI insurers have been lobbying Congress to make PMI premiums deductible, so far without success. Their argument is PMI helps increase home sales and the national economy, promotes home ownership and raises construction employment. But the counter-argument is PMI deductions would decrease income-tax revenue.
To overcome this non-deductibility drawback, a few mortgage lenders don’t charge PMI on their high-ratio home loans. Instead, they charge a slightly higher (tax deductible) mortgage interest rate, which includes PMI. But the disadvantage is the borrower pays the higher interest rate for the life of the mortgage.
HOW TO CANCEL YOUR P.M.I. In 1999, Congress enacted virtually worthless legislation requiring lenders to cancel PMI premiums when a borrower’s loan-to-value ratio drops below 78 percent of the original loan balance.
However, this law doesn’t consider (a) market-value appreciation of the home or (b) a homeowner’s capital improvements, which increase the market value of the residence. The cruel result for PMI borrowers is it takes at least 10 years to meet the “78 percent” test by paying down their mortgage balance.
Fortunately, most mortgage lenders instead have adopted the Fannie Mae and Freddie Mac guidelines. These rules allow PMI cancellation after at least 24 months of on-time mortgage payments when the borrower’s home equity is at least 20 percent as shown by a new appraisal from a lender’s “approved appraiser” paid for by the borrower.
However, it is up to the PMI borrower to initiate PMI cancellation with the lender. If you think you are eligible to cancel PMI, contact your loan servicer.
You will then be informed you must pay an appraiser from the lender’s approved list. Typical appraisal fees are $300 to $400. That is a very profitable expense to get rid of your no-longer-needed PMI premium after the lender has virtually no foreclosure loss risk.
But some lenders refuse to follow the Fannie Mae-Freddie Mac guidelines to cancel PMI premiums. Instead, they insist the home loan be paid down below 78 percent of its original balance before canceling PMI. If you have such an uncooperative lender, the easiest way to get rid of PMI is to refinance with another lender who does not require PMI.
REQUEST A P.M.I. REFUND AFTER CANCELLATION. After your lender agrees to cancel PMI, or if you pay off a PMI mortgage in full, ask the lender for a partial refund of the current year’s PMI premium.
You may be entitled to this refund because lenders usually collect PMI monthly from borrowers but remit premiums annually to the PMI insurer. The result is you may be owed a PMI balance for the unearned premiums, which are refundable to you.
But you must ask. Refund checks of $100 to $1,500 or more are not unusual after PMI is cancelled or you pay off a PMI mortgage. If the lender refuses to account for your PMI premiums and you think you are entitled to a partial refund, the local Small Claims Court is a good place to claim your PMI refund from the lender.
P.M.I. DOES NOT APPLY TO F.H.A. HOME LOANS. Many borrowers who have FHA home loans erroneously think they pay PMI each month. They do not. Instead, FHA charges MMI (mutual mortgage insurance) or MI (mortgage insurance). When an FHA home loan is fully paid off, there might be a partial refund entitlement.
At the time of paying off an FHA mortgage, ask if you are entitled to a MMI or MI partial refund. If you don’t receive a refund check within 45 days, contact HUD at 1-800-697-6967 or write to U.S. Dept. of Housing and Urban Development, P.O. Box 23699, Washington, DC 20026-3699. Or, on the Internet go to www.hud.gov/fha/comp/refunds and enter your exact borrower’s full name and FHA case number to see if HUD owes you a partial refund after paying off your FHA mortgage.
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