By: Yara Zakharia, Esq.
For the majority of first-home buyers today, a 20 percent down payment is a long shot, considering the high price of homes in many markets across the United States. For this segment of the population, mortgage insurance has proven to be the solution and a wise choice. With the protection of mortgage insurance, home loan lenders are willing to offer loans with very low down payments, or even none in some cases.
Private mortgage insurance or PMI (also known as Lenders mortgage insurance or LMI), provided by private insurance companies, is the predictable, affordable, tax deductible and cancelable mechanism that enables borrowers to purchase a home with a low down payment and reasonable mortgage rate. It is, in essence, an insurance payable to and protecting the lender in case the borrower defaults and the lender cannot recover its costs (i.e. legal costs, lost income) after foreclosing the loan and selling the mortgaged property.
The mortgagor (borrower) pays for the policy, and the private mortgage insurance usually covers a portion of the amount borrowed. With mortgage insurance, a qualified borrower can purchase a home with a down payment as low as three percent or less, rather than the 20 percent down payment lenders traditionally have required for uninsured loans.
The cost of mortgage insurance depends on several factors:
- the home loan amount
- the percentage of the down payment
- the type of mortgage insurance obtained (private or public)
- the borrower's credit score
- the loan-to-value ratio (LTV)
- the occupancy (primary residence, second home, investment property)
- the documentation furnished at loan origination
Mortgage insurance may be payable up front or on a monthly basis. Borrowers only have to write one check and the cost will not increase over time.
Mortgage insurance is usually temporary and is typically only charged if the down payment is less than 20% of the appraised value or sales price. Pursuant to the Homeowners Protection Act of 1998, mortgage insurance must be canceled when the principal reaches 80% of the sales price, or otherwise stated, when the borrower's equity attains 20%.
Cancelling mortgage insurance, however, can be a complex process. Sometimes, lenders will require borrowers to make mortgage insurance payments for a set period, even if the principal reaches 80%. It is the mortgage lender who must make a request to the mortgage insurance company asking it to cancel the mortgage insurance. Oftentimes, the lender will request a new appraisal to determine the LTV. Borrowers can cancel their mortgage insurance much quicker if they submit a new appraisal reflecting that the loan balance is less than 80% of the home's value, due to appreciation. This usually requires two years of timely payments.
Beginning this year, mortgage insurance will be tax-deductible and borrowers with an adjusted gross income of $100,000 or less will be able to benefit from this new provision.
Borrowers might also want to consider getting mortgage insurance protection for coverage in cases of disability and injury. As for a mortgage insurance quote, it can be obtained easily and free-of-charge online by consulting such websites as SecureInsuranceQuotes.com.
By acquiring mortgage insurance, borrowers will be able to purchase a home and build equity much faster (in fact, years sooner) than if they waited to reach the 20% figure. Mortgage insurance gets borrowers settled in a home before prices go up. Afterwards, rising values can only benefit the borrower since it will enable them to cancel their mortgage insurance more rapidly.
By taking things one step at a time, following the purchasing process in a methodical manner, and using private mortgage insurance, chances are the borrower will move in to a brand new home that he can call his own.
