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Do You Have Enough Private Mortgage Insurance (PMI)

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Anyone who has owned a home with a mortgage can tell you that you should have, and in most cases are required to have, private mortgage insurance (PMI). PMI shields lenders and investors both from loss if the borrower is unable to continue with their payments for any reason whatsoever.  It is not homeowners' insurance. Homeowners’ insurance guards you from loss by theft, fire or other tragedy. Simply, PMI protects the lender; in the case the borrower cannot satisfy his payment responsibilities.

Another distinct advantage to mortgage insurance, and one which in our current climate of “loan drought”, is that prospective home owners are able to purchase property with as little as a three to five percent down payment  if mortgage insurance is a part of the agreement. In many cases those who would not have been able to acquire property are now able to realize that dream. The reasoning behind this is that banks have learned that historically those who have less than twenty percent to put down on a home are more likely to eventually default, and much sooner than those who were able to save enough to put a substantial down payment towards their purchase.

PMI can not only benefit those buying a home for the first time but also those who have outgrown a current property and now wish to trade-up. A PMI policy can allow these property owners a broader variety of homes to consider and save them cash to use towards other expenses or investments, help them to pay off other debt,  renovate or improve a property or put some aside for a rainy day.

Who is a PMI Candidate?

If you have not been able to arrange for other types of disability or life insurance to protect you because of your type of employment or pre-existing health issues than possibly PMI is a solution to look into. Some folks may feel they are in a profession that has a higher rate of layoffs and firings, and they also need to protect themselves from the eventualities of life by purchasing insurance. The third group of investors who should consider protection is people who do not have savings to fall back on in case of a financial crisis related to a family emergency or becoming disabled either temporarily or in the worst case, permanently.

Like anything that has benefits PMI does have a couple drawbacks. PMI policies only insure the balance owed on your mortgage. The other downside is that premiums are high when compared to basic life insurance premiums which afford much better value, and most especially for those folks who do not have pre-existing medical conditions.

The Qualifying Process.

Qualifying for a mortgage loan that carries PMI is basically the same as for those which do not. A prospective borrower must meet the minimum income requirements that are prescribed and that amount must be sufficient to cover the monthly mortgage amount and the closing costs as well. Needless to say, the better your credit rating/score the better your chances will be, and the better the offered rates and terms will be too.
Further, if you are a homeowner that is looking to refinance a current loan agreement PMI can provide some flexibility by allowing for some cash back for your other financial commitments such as on-going medical expenses or tuition for a child’s education, and even renovations and home improvements. PMI can also help a refinancing by paying off a second or third mortgage.

Who Sells PMI?

Borrowers cannot purchase PMI themselves, the lender must arrange for this as part of the loan process. However, borrowers may ask which options are available to them and better tailor the PMI to their needs or constraints.

How Long Must a Borrower Carry Insurance on Their Mortgage?

If you purchased your loan prior to July 29, 1999 your PMI coverage will automatically stop once you have paid in seventy-eight percent of the original value of the property and you are current on your loan with these three exceptions:

  • There is a second mortgage on the property
  • The value of the property has declined
  • You had a payment late by thirty days or more within the year preceding the cancellation date, or late by sixty days or more in the year before that.

This is federal law. If you paid your insurance up-front, rather than on a monthly basis, once the PMI is no longer in effect you will possibly get a refund to be calculated at that time. Needless to say if you opted for monthly installments you receive nothing when the term for PMI is satisfied. It is prudent to discuss these aspects before hand with the lender so that you understand fully what will happen in the future.

The Two Distinctly Different Insurances Available: FHA and PMI

PMI mortgage insurance most often costs less than FHA program insurance, who's official name is Mortgage Insurance Premium (MIP) and it will cover the top twenty to thirty percent of a loan. The FHA alternative covers one hundred percent of the loan in question. PMI insurance also has no cap in regard to maximum loan amounts to be insured, but the FHA insurance policies are subject to maximum amounts that are relative to the value of housing within the jurisdiction of the property to be insured.

Keep in mind that MIPs are a requirement of the FHA and are paid in two parts. The first part is financed and bundled in with the loan itself and delivered at the time of the closing, and the second part is paid monthly as an escrow amount. Another important aspect of the FHA, and its rules and policies is that when changes are announced to their requirements they are never retroactive and only apply to new loan agreements.

Because the FHA provides loans for less money down and the credit requirements are not as confining as conventional loans they offset the higher risk with the required MPI. This helps to encourage property acquisition for those who are unable to put more money down initially and it helps to offset risk on the part of the FHA lenders. These programs have helped many Americans realize their dream of home ownership.

As mentioned above, in the past the FHA required that MIPs be in effect for the full term of a loan, but as of July 29, 1999 they stipulated that for all future loans once they had been paid down to seventy-eight percent of the sale price of the property the MIP could be dropped to offer some relief to the borrowers. You can make additional payments against your principal balance to help accelerate this though. Once the time constraints have passed it is also prudent to check your monthly statements to make sure the payment has been suspended.

To further protect yourself from loss never rely on a brochure or pamphlet that has been given to you as a marketing tool. Always read the actual policy in full, or have your legal/financial advisor look it over if you do not understand it fully. Most often the brochure and the policy will differ in many ways.

Can Insurance Coverage Be Purchased That Will Guard Against Job Loss or Disability?

There are policies that can be purchased that not only make your payments for you if you are disabled or lose your job, but most often times a health exam is not required to put them into effect. Some of these policies have a monthly payout upwards of two thousand dollars.

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