Do I need private mortgage insurance?
Every lender wants security—some form of collateral that can be claimed, and if necessary, liquidated—in the event that the borrower doesn't pay.
Properties tend to be secured by "equity." That's the margin between the loan balance and the value of the underlying property. Consider a $60,000 loan secured by a $100,000 home. There is plenty of equity ($40,000 of it), so the lender has plenty of security. If the monthly payments don't come in, the lender can claim the home in a foreclosure.
When the equity is not so substantial, however, the lender has a problem. Even if the home is taken in foreclosure, its value may not match the money that's owed on the mortgage. And the lender must factor in the added costs of hiring lawyers, owning the home for a while, and then maybe paying a broker's commission to resell it.
Enter the solution: Private Mortgage Insurance, or PMI. Traditionally, when a loan balance exceeds 80 percent of the home's value, the owner has been required to insure his ability to pay. If he didn't pay, the insurer would step in and pay if off for him.
PMI has long been required of homebuyers with less than 20 percent to put down. The rates are determined by a formula like this: Multiply the loan balance by .005. So an $80,000 balance would require annual PMI of $400, which is divided into monthly payments of $33.
Most homebuyers need PMI because 20 percent of the sale price on a home is a big chunk of money. But when the principle balance drops below 80 percent of the home value (perhaps after a few years of payments) lenders are required to notify homeowners and drop the PMI requirement.
With the looser lending standards of the past decade, the lending industry devised ways for borrowers to dodge the PMI requirement. A borrower lacking a 20 percent payment was allowed to take out a "second" loan to make up the difference.
Someone with only a 10 percent down payment, for example, could accept one loan for 80 percent of the purchase price and a second one for 10 percent. The "second" has a higher interest rate because the lender is at greater risk and if the home is foreclosed, his lien is in a junior position to the first lender. And voila! No more PMI. Another advantage to the buyer was that interest paid on the second loan was tax deductible—unlike PMI.
However, financing tricks like that are mostly a thing of the past. At this point, very few lenders have much cash to put into second-position loans on purchases that are already highly leveraged. Another option in the past was to pay more interest on your first-position note. Some lenders were willing to waive the PMI requirement in exchange for interest rates .75 percent to 1 percent higher. Nice terms if you can find them. But if you do, check your calendar—you may be stuck in a 10-year time warp.
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When shopping for a home, you're going to be asked at some point whether you've been "pre-approved" or whether you have mortgage "pre-approval." You're going to want to answer "yes" to these questions -- buyers who can are in a much better position to purchase ...
By Trulia | 38 Comments
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Qualified mortgage insurance is provided by the U.S. Department of Veterans Affairs, the Federal Housing Administration, the Rural Housing Service, and private mortgage insurance (PMI) companies. Taxpayers can treat qualified mortgage insurance premiums paid or accrued during the tax year as home mortgage interest. The insurance coverage must relate to home acquisition debt, the insurance contract must have been issued after 2006, and the taxpayer must have paid the premiums before 2010 for coverage in effect during 2009. PMI is deductible on Schedule A, line 13.
In order to deduct PMI, the taxpayer must meet these qualifications:
Paid or accrued January 1, 2009 - December 31, 2009
Borrowers obtained mortgage to buy, build, or improve their home
If AGI is more than $100,000 ($50,000 if Married Filing Separately), the amount of mortgage insurance premiums that would otherwise be deductible is reduced or eliminated
**In today's environment of changing guidelines, overlays, market to market varances I would strongly recommend doing your homeword with your LENDER about the ability and chances of getting mortgage insurnace. There are any blanket yes or no answers for this since every borrower, property and lender is different. A good rule of thumb is to FHA to have a much better chance at MI, or put down at least 10% if going with traditional conventional MI coverage. 5% down coverage is very hard to obtain.
please contact me with any questions or clairification.
Chad Bergman, CML
Frost Mortgage
http://www.MyDenverHouse.com
I am divorced, recently retired, and disabled, woman. I have the income to purchase due to a sales contract and funds coming in, but I have close to a $800 per month 2007 Jeep which I will be refinancing with the credit union in less than a year, the balance is $30,000 and I have paid two years on it. Traded cars due to accident and got upside down on the equity and didn't realize it. That is my major debt. By buying a home, my rent payments are reduced $500, so I will have no trouble with the mortgage. My plan is to also have a roommate within two years that will pay half the mortgage and utilities cost. Will he underwriters take that into consideration when reviewing my ability to pay. I don't want to be penalized at closing by the lender for points due to their thinking I don't have ability to pay in future, because I will, I already have several people asking to share my home and one is a very good friend of mine. how does this work.
I FELT I NEEDED TO ADD TO MY FIRST COMMENTS. MY SISTER IS A MORTAGE BANKER OR WAS ONE, BUT I FOUND RELATIVES ARE HARD TO WORK WITH, IT IS TO UNCOMFORTABLE. I JUST DON'T WANT A LOT OF STRESS OVER THIS. I AM LOOKING TO BUY A HOME FOR NO MORE THAN $80,000 . NEW NEVER BEEN LIVED IN - IN A HOUSIN TRACT IN MADRAS. HOPE I CAN MAKE THIS WORK. CMAY
NO PMI !! yea !!
I also feel they can assist "first time buyers" with NO MI loans even if they are not of the stated occupations listed above here, so good for everybody. I have had many clients use this service sucessfully. Good luck house hunting. DB
Great article!
good leader to head the things to come out on conclusion.
john
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Best Home Loan
very critical and need an experience complainer to resolve it.
john
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[url=http://www.infomortgages.com]Best Home Loan[/url]
work, which will be a success story.
john
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Best Home Loan
1. Paying 20% down or more
2. Splitting the loan up into two liens
3. Ask your lender for a Lender Paid MI option
If you are not familiar with these options please contact me at your convenience for more details.
Thank you.
http://www.elliottoliva.com/FHAInsurancevsPMI
Gina
http://sunbrellapillows.net
http://www.californiarealestateloanshop.com
Its best to buy now with record low interest rates in addition to Huge tax benefits
Best of Luck to you,
Bob
http://www.schaedlerinsurance.com/california-business-insurance/bond-insurance/california-contractors-bond/
andrew
website - http://www.suretybonds.info