What a Home Buyer Needs to Know About PMI
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If you put less than 20 percent down on a home mortgage, lenders often require you to have Private Mortgage Insurance (PMI). PMI protects the lender if a home buyer were to default on the loan.
PMI is extra insurance that lenders require from most home buyers who obtain loans that are more than 80 percent of their new home’s value or stated more clearly, a home buyer with less than a 20 percent down payment is required to pay PMI. The premium is usually paid on a monthly basis usually along with the mortgage payment and can range approximately between $250.00 to $1,200 per year.
Homebuyers may ask, “What is the benefit to them”? PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on their mortgage or loan. The greater benefit to the home buyer is that with this type of insurance, the home buyer can buy a home with as little as 3 percent to 5 percent down payment. This allows the buyer the opportunity to buy a home sooner rather than waiting years to accumulate a large down payment.
For example, the current national median for a home is $248,000.00, the 20 percent down payment required for such a home would be $49,600. With PMI, the home buyer (using the 5 percent down payment) would be required to have a down payment of $12,400.00 a difference of $37,200 dollars! This is obviously a huge difference and as mentioned before enables a home buyer to get into a home a lot sooner than he or she might have anticipated.
When the loan is paid down to 80 percent a homeowner can request the cancellation of PMI. Of course, in the past, the problem had been that the home buyer would be saddled with the responsibility of tracking their payment history and requesting cancellation. Many homeowners were not aware of the possibility and they would continue paying unnecessary premiums for several years.
A new law called The Homeowners Protection Act of 1998 – which became effective in 1999 – required lenders to provide certain disclosures concerning PMI and established rules for automatic termination and borrower cancellation of PMI on home mortgages. These protections apply to certain home mortgages signed on or after July 29, 1999 for the purchase, initial construction, or refinance of a single-family home. These protections do not apply to government-insured FHA or VA loans or to loans with lender-paid PMI.
Other exceptions include: if your loan is a “high-risk” type of loan, and another exception is if you have not been current on your payments within the year prior to the time for termination or cancellation. A third exception is if you have other liens (A form of encumbrance which usually makes the property security for the payment of a debt i.e. judgments, unpaid taxes, mortgages, etc.) on your property. For these loans, your PMI may continue.
If a homeowner had not considered their PMI requirements when they purchased a home, a homeowner should ask their lender or mortgage servicer (a company that collects your payments) for more information about these requirements or conduct an internet search on the term “private mortgage insurance” for more additional in depth information.
