Despite all the negative publicity about the so-called “mortgage meltdown” with more than 100 major mortgage lenders either filing bankruptcy or being unable to fund their home loan commitments, low- and no-down-payment PMI (private mortgage insurance) mortgages are readily available if you have steady income and good credit.
According to the Mortgage Insurance Companies of America, a trade group, the use of PMI is up 40 percent during the first half of 2007 from the same period in 2006.
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WHAT IS PMI? Most home buyers have heard of government-sponsored VA (U.S. Department of Veterans Affairs) and FHA (Federal Housing Administration) low-down-payment home loans. But they aren’t suitable for many home buyers, especially if you are not a veteran or home prices are too high in your city.
If you want to buy a house or condominium but can’t obtain a VA or FHA mortgage and are “cash challenged” with only a small down payment, PMI lenders loan 90, 95, 97, 100 and even 103 percent of a home’s purchase price. PMI insures the riskiest top 20 percent of conventional mortgages in case of a foreclosure loss to the lender.
For example, suppose you want to buy a $400,000 house with little or no cash down payment. If you default and the lender suffers a foreclosure loss, the PMI insurer will generally pay the 20 percent of the lender’s loss exceeding 80 percent of the loan balance. That’s about $80,000 in this situation.
But PMI should not be confused with mortgage life insurance, which pays off your mortgage if you die. PMI protects lenders, not borrowers. It enabled more than 2 million buyers to purchase homes last year.
PROS AND CONS OF PMI. PMI monthly premiums, usually paid along with the monthly mortgage PITI (principal, interest, taxes and insurance) payment, typically add between $50 and several hundred dollars per month to the cost of home ownership.
There are six nationwide PMI companies: AIG United Guaranty, Genworth Mortgage Insurance Corp., Mortgage Guaranty Insurance Corp. (MGIC), PMI Mortgage Insurance Co., Republic Mortgage Insurance Co., and Triad Guaranty Insurance Corp.
These PMI companies work with home loan originators such as banks, credit unions and mortgage bankers to prevent mortgage losses by establishing underwriting standards and insuring home loans across the nation. By diversifying, PMI companies minimize their losses if one area suffers substantial foreclosure defaults.
Although PMI premiums seem expensive, they enable buyers to purchase homes with minimal out-of-pocket cash. To make PMI, VA and FHA home loans more attractive, their mortgage insurance premiums are now tax-deductible, but only for new PMI, FHA and VA loans originated after Jan. 1, 2007, for borrowers with less than $100,000 annual gross income (AGI). However, this new tax deduction does not apply to mortgages originated before 2007.
HOW TO CANCEL PMI PREMIUMS. According to the Mortgage Insurance Companies of America (MICA), 90 percent of homeowners with PMI cancel within five years. Each mortgage lender, not the PMI insurer, makes its own cancellation rules.
Generally, when a homeowner’s equity exceeds 20 percent, as shown by a new appraisal from an appraiser selected by the mortgage lender, the monthly PMI premium will be canceled by the lender. To qualify, the borrower must have a record of on-time monthly payments.
It is up to the borrower to request PMI cancellation and pay for the new appraisal from an approved appraiser. If you think you are eligible, contact your loan servicer.
In 1999, Congress enacted legislation requiring automatic PMI premium cancellation when a home loan borrower’s loan-to-value ratio drops below 78 percent of the loan’s original balance.
But this law, applicable to PMI loans originated after July 29, 1999, does not consider (a) a home’s market-value appreciation or (b) the homeowner’s capital improvements, which added market value to the residence.
The result for most PMI borrowers is this law doesn’t help much because it takes about 10 years for most home loans to reach the 78 percent level.
AFTER CANCELLATION, YOU MAY BE ENTITLED TO A PARTIAL PMI REFUND. If you pay off your PMI mortgage in full or the lender agrees to cancel the PMI based on a new appraisal showing at least 20 percent home equity, some borrowers discover they are entitled to a partial PMI refund.
This refund can arise because PMI premiums are collected by the loan servicer each month, but the premium is usually paid annually to the PMI insurer. But the borrower must ask.
Refund checks of $100 to $1,500 or more are not unusual. If your lender refuses to account for your PMI premiums and you think you are entitled to a partial refund, the local small claims court is the best place to get the lender’s attention and receive a judgment for the refund.
FHA HOME LOANS DO NOT HAVE PMI. Just to confuse the situation, FHA borrowers have a different type of mortgage insurance, usually called MI, MMI or MIP. When an FHA home loan is fully paid off, a partial mortgage insurance refund may be due to the borrower.
After you have paid off your FHA mortgage in full, ask the loan servicer if you are entitled to an MI, MMI or MIP refund. If you don’t receive a refund check within 45 days, contact HUD at 1-800-697-6967 or write to U.S. Department of Housing and Urban Development, P.O. Box 23699, Washington, D.C., 20026-3699. On the Internet, go to www.hud.gov/fha/comp/refunds and enter your FHA case number with exact borrower’s full name to see if HUD owes you a partial refund after FHA mortgage payoff.
SUMMARY: PMI home loans enable borrowers to obtain mortgages with little or no cash down payments. Unlike VA and FHA mortgages, which often have restrictions to make them inappropriate for most home buyers, PMI mortgages are available regardless of loan amount if you have good income and good credit.
For new PMI, FHA and VA mortgages originated after Jan. 1, 2007, the mortgage insurance fees are tax-deductible for borrowers with less than $100,000 adjusted gross income.
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