PMI
A borrower who has less than 20 percent for a down payment will normally be required to obtain mortgage insurance before qualifying for a conventional loan at the best interest rates available. Mortgage insurance called PMI (Private Mortgage Insurance) is expensive and doesn’t insure the borrower but the lender from the borrower’s default on their mortgage. If the borrower defaults, PMI writes the check to the lender who made the loan
Depending upon the amount of a borrower’s down-payment will determine the PMI premium. If a borrower only has only 5 percent available for a down payment the amount of PMI will be nearly .85 percent of the loan amount over the course of the year. So, on a $300,000 loan amount the yearly premium will be $2,550 or $212 a month. A larger down payment will reduce the amount of the yearly PMI premium.
Unlike interest, PMI is not tax deductible. To avoid paying the PMI many borrowers will arrange for two mortgages. The first mortgage will reflect an equity position of at least 20 percent, thus avoiding paying the PMI premium and then arrange to have a second mortgage for the balance of loan amount needed. While obtaining a second mortgage accomplishes the goal of avoiding non- deductible PMI, interest rates on second loans are usually 2 to 3 percentage points higher than interest rates on first mortgages. The combined payment of the first and second mortgage is usually close to the amount had a borrower elected only one loan and pay the PMI.
A borrower with a combination of a first and second mortgage (combo loan) will have little chance in the future to obtain a home-equity line of credit unless the second mortgage is refinanced. Lenders take a dim view of having a third mortgage on a property. Borrows who have only one mortgage but with PMI will have no such problem.
The PMI premium will remain as part of the loan until a borrower has sufficient equity in the property usually 20 to 25 percent at which time the borrower can request the PMI Company to drop their premium.
Some lenders provide higher interest loans and absorb the PMI premium themselves. This allows a borrower to avoid the expense of a second mortgage and a PMI premium in exchange for a higher interest rate.
As distasteful as PMI is to borrowers, it has allowed borrowers to buy houses with little down payment at the best interest rates available. Years ago, most homebuyers were required to have a 20 percent down-payment to obtain financing from a Saving and Loan in order top buy a house. FHA, VA and PMI revolutionized the housing industry. In 1950 less than 45 percent of American owned their own home. Today, the percentage of Americans who own their own home is over 70 percent. And while FHA and VA are no longer major players in financing homes in California PMI still is.
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Depending upon the amount of a borrower’s down-payment will determine the PMI premium. If a borrower only has only 5 percent available for a down payment the amount of PMI will be nearly .85 percent of the loan amount over the course of the year. So, on a $300,000 loan amount the yearly premium will be $2,550 or $212 a month. A larger down payment will reduce the amount of the yearly PMI premium.
Unlike interest, PMI is not tax deductible. To avoid paying the PMI many borrowers will arrange for two mortgages. The first mortgage will reflect an equity position of at least 20 percent, thus avoiding paying the PMI premium and then arrange to have a second mortgage for the balance of loan amount needed. While obtaining a second mortgage accomplishes the goal of avoiding non- deductible PMI, interest rates on second loans are usually 2 to 3 percentage points higher than interest rates on first mortgages. The combined payment of the first and second mortgage is usually close to the amount had a borrower elected only one loan and pay the PMI.
A borrower with a combination of a first and second mortgage (combo loan) will have little chance in the future to obtain a home-equity line of credit unless the second mortgage is refinanced. Lenders take a dim view of having a third mortgage on a property. Borrows who have only one mortgage but with PMI will have no such problem.
The PMI premium will remain as part of the loan until a borrower has sufficient equity in the property usually 20 to 25 percent at which time the borrower can request the PMI Company to drop their premium.
Some lenders provide higher interest loans and absorb the PMI premium themselves. This allows a borrower to avoid the expense of a second mortgage and a PMI premium in exchange for a higher interest rate.
As distasteful as PMI is to borrowers, it has allowed borrowers to buy houses with little down payment at the best interest rates available. Years ago, most homebuyers were required to have a 20 percent down-payment to obtain financing from a Saving and Loan in order top buy a house. FHA, VA and PMI revolutionized the housing industry. In 1950 less than 45 percent of American owned their own home. Today, the percentage of Americans who own their own home is over 70 percent. And while FHA and VA are no longer major players in financing homes in California PMI still is.
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posted by Ken Calhoon at 7:38 AM
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