Mortgage Protection Insurance Services Explained from Schmeg.com

   

Private Mortgage Insurance or Mortgage Protection Insurance Services, or PMI, is a term that’s new to many first-time home buyers. It is a requirement most lenders make when home buyers purchase a home with less than the standard twenty percent down payment. While this PMI requirement can help buyers get into a home with less upfront cash, it adds a hefty monthly cost to each month’s mortgage payment.

Private Mortgage Insurance is an insurance policy that serves to protect the lender against loss if the buyer defaults on the loan. PMI only protects the lender and the buyer is responsible for paying the premiums. PMI premiums are higher for those with the smallest down payments and lower for those with down payments that are higher. For example, if you put ten percent down on your new home, your PMI will be lower than if you put just five percent down.

While PMI enables buyers to obtain home ownership with less upfront money, paying PMI premiums each month becomes a financial hardship of its own. Paying monthly PMI premiums doesn’t do anything but protect the lender, it doesn’t reduce your equity or give you any benefit and it can be a large monthly amount.

If at all possible, avoid loans that have a PMI requirement. You may even consider borrowing the down payment or taking out a second mortgage so that you can avoid paying PMI in the first place. For example, if you have just ten percent to put down on your new home, consider a traditional eighty percent loan along with a second mortgage of ten percent. These are typically called “Piggyback” loans because you’re piggybacking one loan with another.

While it may seem scary to carry two mortgages, at least your payments are benefiting you both in reducing your debt and tax liability. Mortgage interest is tax deductible. PMI, on the other hand, is not deductible and doesn’t benefit you in the slightest.

Another way to avoid PMI requirements is to opt for a higher interest loan. Many lenders waive PMI in exchange for a higher interest rate. While this may make you cringe, at least you can deduct the interest and reduce your annual income tax bill.

If you already have PMI on your existing loan, you’ll want to do whatever you can to get it removed. If property values have risen since your purchase, you may have reached the twenty percent home equity level that lenders like to see. If this seems likely, you might hire an appraiser to re-appraise your home. Arm yourself with this information and ask your lender to remove the PMI requirement. Some lenders have a specified waiting period before they will entertain removing PMI due to increased home values. This waiting period is typically about two years. It doesn’t hurt to ask though, especially if you have a good track record of paying your bills.

Take a look at your loan information. Have you paid down the principle enough to be at or near the twenty percent benchmark? Do you have an excellent history of on-time payments to the lender? If you’re close, consider making extra principle payments and asking your lender to remove the PMI.

Lenders have been known to be stubborn about removing Private Mortgage Insurance requirements. Be persistent. The Homeowner’s Protection Act of 1998 kicks in when your loan balance hits seventy eight percent provided the mortgage was funded after July 1999. When that happens lenders are supposed to automatically cancel the PMI requirement. Make sure you have an excellent payment history and that your home is free of any liens, otherwise provisions of the Homeowner’s Protection Act allow the lender to continue to require PMI.

Note: FHA loans are exempt from the Homeowner’s Protection Act. You may be better off refinancing in this case.

Consider refinancing. Chances are you’ll even end up with a better interest rate. You will need to make some critical decisions about how long you will remain in the home and balance the costs of refinancing with your projected savings. Many of these costs are deductible. If market conditions are favorable, you’ll be pleased with lower house payments and even happier not to have the additional PMI bill on top!

Another way to remove PMI quickly is to dedicate yourself to paying down your loan balance. The sooner you have twenty percent home equity, the sooner you can get rid of the unnecessary PMI payment. This involves putting as much extra cash as possible into your home by making extra principle payments. Each month, designate extra money towards the principle. Make it very clear to the lender by writing a separate check and noting that the payment is to be applied to the principle portion of your home loan. Try to make at least one extra mortgage principle payment each year if not more. When you get a tax refund from the IRS, instead of spending it foolishly, use it to knock down your loan balance.