Understand Private Mortgage Insurance before you buy a home
by Jeffrey Hammerberg
We are so accustomed — or conditioned — to paying bills that include miscellaneous fees, taxes and surcharges that we seldom stop to question them. They show up on everything from airline tickets to telephone bills and we just find the grand total and fork it over to avoid additional charges and fines for late payment.
Within the mortgage industry there are many code words, acronyms and nicknames widely used by insiders, but this lingo is often meaningless or bewildering to homeowners. Until we sit down and carefully decipher this kind of abbreviated terminology into everyday language we don’t really grasp its significance.
“PMI” is one of those mysterious charges seen on mortgage documents. But a few dollars here and a few dollars there soon adds up, so it behooves homeowners to understand — and try to avoid — PMI payments.
What is PMI?
PMI stands for Private Mortgage Insurance — a specific type of insurance that mortgage lenders use as protection from financial loss.
• PMI pays out claims to lenders to help reduce the risks they take when they don’t demand a big down payment.
• When you buy a home and put down less than 20 percent, the lender will add a monthly PMI fee to your payment installments. The payment is passed along to the PMI insurance company to pay the premium on the PMI policy.
• Technically, the insurance doesn’t cover you, the homeowner. It only covers the lender.
• The way PMI benefits you, as a consumer, is indirect. Having PMI in place allows you to avoid making the entire 20 percent down payment. In other words, the insurance policy is taken out by the lender, used in lieu of a down payment and paid for in monthly installments by the homeowner
• Without PMI protection for lenders, 20 percent down payments would be a barrier to home ownership for many Americans.
If you default on your loan and the lender has to sell the house to recoup their lost money, the PMI coverage gives them a margin to cover such things as legal fees, closing costs, discounts to the new buyer or Realtor commissions. The PMI policy is used, in other words, to cover the amount of equity that you would have otherwise paid into the property if you had made a full 20 percent down payment.
How to avoid PMI payments
• If you make at least a 20 percent down payment, you don’t have to pay for PMI.
• Another way to avoid PMI is to pay down the principal balance on your loan until it is 80 percent or less and then request that your lender terminate PMI. (Keep in mind that with a typical fixed-rate 30-year loan, it might take 10 years to reduce your balance that much.)
• Financial experts recommend that homeowners keep track of their outstanding balance, so that as soon as the 20 percent rule is satisfied, they can discontinue PMI payments to save money.
• In some cases you can use market appreciation to avoid PMI. In other words, if you owe less than 75 or 80 percent of the appraised value of your home, you may be able to discontinue PMI. Check with your lender or real estate attorney to determine exactly what guidelines apply to your mortgage.
A special tax twist for 2007
Hopefully by now you have figured out how PMI basically works. But just to complicate matters, Congress and the Internal Revenue Service have thrown a new feature into the PMI calculation for 2007. The good news is that it involves a tax deduction that might save you a considerable amount of money.
• Congress has passed legislation that will make 2007 PMI payments tax deductible. They may extend the deduction after they review the results of this trial period experiment, but that remains to be seen. Meanwhile, if you have been toying with the idea of taking out a mortgage or refinancing, this may be the best year to go ahead and do it.
• If you borrow 100 percent of the financing to buy a $300,000 home and the PMI charges are in the $180 range, that adds up to a potential 2007 PMI deduction of more than $2,000. The PMI premium is 100 percent deductible if your household adjusted gross income does not exceed $100,000.
Decoding PMI guidelines
There are complex exceptions to the PMI rules explained above, especially on loans made before 1999 when more homeowner-friendly PMI laws were passed. The best way to gain insight into your PMI situation — and find out exactly when you become eligible to stop paying for it — is to talk to your attorney or financial planner. While many people avoid PMI completely, others get it dropped after just two years thanks to price appreciation in the appraised market value of their home.
— For expert help with mortgage and real estate needs, contact www.GayMortgageLoans.com or www.GayRealEstate.com. Or call toll free 1-888-420-MOVE (6683). This global network of professionals is dedicated to the LGBT community.