Have you been asking yourself, What is PMI? Also known as private mortgage insurance, it could be your solution to home buying with a small down payment.
For years banks required a 20% down payment from home buyers. However when a buoyant economy caused home prices to rise, saving a sufficient down payment became harder... and harder.
So private mortgage insurance allowed thousands of home buyers to purchase the house of their dreams with minimal down payments. It also made refinancing easier for homeowners with less equity.
Update: On January 2, 2013, President Obama signed the Bush American Taxpayer Relief Act of 2012 into law.
This means many homeowners who are paying mortgage insurance can continue to deduct it, just as they deduct mortgage interest on their home loans.
The 2013 law applies to personal residences and second (or vacation) homes financed with conventional and many government-backed mortgages.
As with all tax matters, check with your accountant to see if you can benefit from the American Taxpayer Relief Act of 2012 and deductible mortgage insurance premiums.
Here is an example of PMI making homeownership possible. 20% of a $300,000 house equals a $60,000 down payment. No surprise, this can be a struggle especially for first time home buyers.
Just the opposite, real estate values drop from time to time and homes lose value. Overnight, homeowners can end up with insufficient equity to refinance. But with the backing of mortgage insurance, lenders can approve refinancing with less than 20% equity.
In short, mortgage insurance can help home buying and refinancing.
PMI insures mortgage lenders against losses incurred when borrowers are unable to make their monthly house payments. PMI does not insure homeowners.
As previously stated, PMI insures mortgage lenders. It is not life insurance and does not cover monthly house payments in the event of job loss or death.
PMI helps homeowners with less than 20% equity. It assists refinances after the loss of equity. Mortgage insurance also befriends home buyers with less than 20% for a down payment.
Generally, PMI is included in monthly house payments. Ask your lender about alternative upfront lump sum payments or lender-paid insurance, sometimes called lender self-insuring.
During the home mortgage process, the lender applies for the PMI approval on behalf of the borrower.
In part, PMI approval and cost is based on equity or down payment, credit history, occupancy status, loan type and size of the home mortgage.
PMI comes from private companies. It is purchased by lenders and charged to borrowers. It insures conventional loans.
In the case of FHA, borrowers usually pay a monthly fee and finance a lump sum, depending on the FHA program. Both amounts go into a federal account to insure lenders against borrower's default on FHA mortgage loans.
Is it a one-size-fits-all amount or does the cost vary? You can find the answer at How Lenders Calculate PMI.
Traditionally, home buyers have been opposed to PMI since it was tedious to cancel. In 1998, federal laws changed helping qualified homeowners get rid of the costly mortgage insurance under the guidance of The Homeowner's Protection Act.
Discover how lenders calculate PMI removal and when you could need a current appraisal at How Do I Cancel PMI?
What if you could ask a mortgage insider anything you wanted regarding PMI underwriting approvals? Now you can.
Ask Kate is specifically designed to answer your questions and create dialog regarding mortgage solutions.
A Reader asks Kate, Who determines the cost of mortgage insurance.
Lender Paid Mortgage Insurance Halts HARP Refinance - Although she has paid her mortgage insurance, Amy's lender never sent them to the MI company. So Fannie Mae won't approve her HARP refi. Chris in Washington and Lloyd in Texas question why their lenders refuse to remove PMI.
Get more of Ask Kate's answers at Paying Private Mortgage Insurance.
You might not know this but you could be entitled to a mortgage insurance refund from FHA.
For home buying help, visit Discover The Magic Of Buying A House.
Refinancing help is found at Refinancing Advice - Nuts And Bolts.
January 2016: The Mortgage Forgiveness Debt Relief Act Update.
September 2015: Fannie Mae and Freddie Mac Improve Loan Modifications.
Keep on the right path at A Homeowner's Survival Guide to the Intimidating Mortgage Process.
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