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What is private mortgage insurance? |
What is private mortgage insurance? Lenders Mortgage Insurance (LMI), also known as Private Mortgage Insurance (PMI), is insurance payable to a lender when taking out a mortgage. It is an insurance in the case that the mortgagor is not able to repay the loan, and the lender is not able to recover its costs after foreclosing the loan and selling the mortgaged property. The LMI may be payable up front, or it may be capitalized onto the loan. This type of insurance is usually only charged if the downpayment is less than 20% of the sales price or appraised value (in other words, the LTV or loan to value ratio should be 80% or less). Once the principal reaches 80%, the LMI is no longer required. Cancelling mortgage insurance can be a difficult process. Sometimes lenders will require that LMI be paid for a fixed period, even if the principal reaches 80%. The cancellation request must come from the Servicer of the mortgage to the PMI company who issued the insurance. Oftentimes the Servicer will require a new appraisal to determine the LTV. The cost of mortgage insurance varies considerably based on several factors which include: loan amount, LTV, occupancy (primary, second home, investment property), documentation provided at loan origination, and most of all, credit score. If a borrower has less than the 20% downpayment needed to avoid a mortgage insurance requirement, they might be able to make use of a second mortgage (sometimes referred to as a "piggy-back loan") to make up the difference . Two popular versions of this lending technique are the so-called 80/10/10 and 80/15/5 arrangements. Both involve obtaining a primary mortgage for 80% LTV. An 80/10/10 program uses a 10% LTV second mortgage with a 10% downpayment, and an 80/15/5 program uses a 15% LTV second mortgage with a 5% downpayment. Other combinations of second mortgage and downpayment amounts might also be available. One advantage of using these arrangements is that under United States tax law, mortgage interest payments may be deductible on the borrower's income taxes, whereas mortgage insurance premiums are not. As such, even though the additional cost of a higher interest rate second mortgage might be similar to the cost of mortgage insurance, the borrower may see a reduction in total costs when the tax benefits are considered. You've got a very comprehensive answer already. Let me just add a couple of small points. You usually need private mortgage insurance when you don't have a large enough downpayment. So, if you can put together at least a 20% downpayment, you won't need this kind of mortgage insurance. However, for those who find saving a challenge, and who want to get into a seller's market (before houses become even more expensive), private mortgage insurance can help you to do that by reducing the risk to your lender, and allowing you to qualify for a larger percentage of your home's value in a mortgage. Keep in mind that we are not in a seller's market right now. Given that housing prices are "soft", I would not be buying with private mortgage insurance. I would be waiting. Financial writer for InsuranceGuide101.com. If you put down less than 20% when you take out a mortgage, you're at a higher likelihood of defaulting on the mortgage than someone who puts down more money. So the banks require you buy it - it protects the bank, if you default on the mortgage. |
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