Private Mortgage Insurance (PMI)
If you are sure, that you will be able to put down at least 20% of the property purchase price, don’t bother to read this article - there is no way any lender should make you pay this insurance. Mortgage insurance is something that happens to you only if you cannot make a 20% down payment.
Well now, if are still reading, that means you are looking for the best way to attend to the 20% business. Nowadays, the following options are available: traditional borrower-paid mortgage insurance (PMI); a second mortgage; a “piggyback” mortgage; and lender-paid mortgage insurance. This article explains only about the borrower-paid insurance. For the “piggyback” (also known as 80/20) option and the lender-paid insurance read my special articles and use this calculator to compare.
Let’s say the amount you have to borrow equals to 90% of the property purchase price. That is 10% more than the golden margin of 80%. Lenders consider that this amount implies a greater risk of the borrower’s possible failure to be able to pay off the debt. Consequently, they demand insurance to protect their interests. This does not sound particularly unfair, does it? What does not sound, but simply is unfair, is the fact that the borrower, who is to pay the insurance premiums, cannot shop for an insurer himself. The borrower is, in fact, forced to agree to whatever insurer and the terms are pushed on him by the lender. Lenders, in their turn, are not particularly motivated to find insurance deals best for the borrower, rather best for themselves, regarding the rate and the referral payments from the insurance company they have contacts with. So, if you choose to get involved in private mortgage insurance, you can try to bargain about it, but do not expect too much in return.
The good news, however, is that PMI payments do not last throughout the whole life of a mortgage. In fact, as soon as the balance hits the 80% of the purchase (or recently appreciated) price margin, the mortgage insurance can be terminated.
Even though counting down from 90% to 80% does not seem to be a long way, in fact, it takes quite some time for a mortgage balance to reach the mark. For example, an 8% 30-year loan for 95% of a property price will balance to 80% only in 142 months! Impressive, isn’t it? An extra monthly payment of $50, however, can shrink this time to 91 months. So if you have a chance to make an extra payment, don’t hesitate - it always pays off well in the final run.
Terminating the insurance is not an easy thing to do. First of all, how can you see when the balance hits the mark? The problem is that your property is very likely to either appreciate or depreciate during the insurance period. If the value of the property has risen, it may so happen that the 80% boarder will be crossed sooner, but you should not expect the lender to be excited about ending the insurance immediately. You have to have official documents, i.e. provided by an appraiser, accepted by your lender, proving the new value of your property. There are also internet sites to be used to estimate the current value of your home before you go for the official version of it. It is very useful, too, to check the theoretical value of your property periodically to develop an idea of its dynamics. The waiting period after the application for termination makes sure that the property price so high shall not drop within another month or two. If you stick to 80% of the purchase price only, things are a little bit easier, because the lender already has this information in an appropriate official form. There are factors, however, that may disqualify you from canceling the insurance no matter what the balance is, such as:
- another loan that you may have,
- the devaluation of the mortgaged property,
- your failure to keep up with the repayment schedule.
Remember - mortgage insurance is your pain, and nobody else, but you yourself, is going to care to rid you of it. You should take the initiative to contact your lender when you feel that the 80% balance to value ratio is reached and ask for a written statement of their insurance termination policy. If your loan was made after July 29, 1999, you will be able to enjoy the advantage of more liberal rules. Under the provision of the 1999 Federal law, lenders are required to cancel private mortgage insurance on most home mortgage loans made after July 29, 1999. Cancellation will occur automatically when amortization has reduced the loan balance to 78% of the value of the property at the time the loan was made. Under another provision of this law, however, lenders must terminate insurance at the borrower’s request when the loan balance hits 80% of the original value. So borrowers who take the initiative can free themselves from the insurance payments earlier.
If your loan was made before July 29, 1999, your only hope is the lender’s rules.
Another important point regarding private mortgage insurance is taxes. Premiums on traditional borrower-pay mortgage insurance were not deductible until 2007, when they were made deductible for that year only, but the income limits made the deduction available mostly to households with incomes between $50,000 and $100,000. As this law involved the year of 2007 only, Congress will now have to renew the deduction to make it apply for the 2008 tax year and beyond. There is a great deal of probability that Congress will extend the deduction, but you can’t know for sure.
Update:
The deduction has been extended through 2010. Now it applies to mortgage insurance contracts issued from Jan. 1, 2007, through Dec. 31, 2009.
