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Why
do lenders require private mortgage insurance?
First, PMI is involved in conventional loans only, not loans insured
through the Federal Housing Administration (FHA) or Veteran's Administration
(VA). The new law does not apply to either FHA or VA loans.
PMI insures the lender against default when the borrower's down
payment is less than 20%.
PMI helps people who have less than 20% available for a down payment.
PMI makes it possible to buy a house with as little as 3% down.
It is estimated that 40% of borrowers currently use PMI to buy a
home with less cash up front.
Are
there alternatives to PMI?
Yes! In fact alternatives to PMI can offer significant tax and equity
advantages. The so-called "piggyback" loan actually involves two
loans. The first mortgage is the principal loan and can be 75%-80%
of the value of the home. The second, or piggyback loan, covers
the difference between the first mortgage and your down payment,
which is generally 10% but some programs permit as much as 15% on
the second mortgage.
Often the total payment for this type of option is the same, or
less than a loan using PMI. However, the tax deduction is higher
and the piggyback loan typically results in faster payment of principal,
which means your equity builds faster. On the other hand, PMI is
just a fee and doesn't provide a tax or equity benefit. There are
strong arguments for and against PMI. Talk with your Cherry Creek
Loan Consultant about your specific situation.
Basics
of the new law
Initial
disclosure: For loans applied for on or after July 29, 1999,
your lender must provide you a written notification at closing explaining
that your mortgage includes private mortgage insurance coverage
and that you have the right to cancel it under certain circumstances.
Annual disclosure: The mortgage servicer, the company to
which you make payments, must send you an annual reminder that your
mortgage includes private mortgage insurance coverage. You may request
cancellation once your property and mortgage meet specific requirements.
This annual disclosure now applies to all loans that include private
mortgage insurance.
Initiating cancellation on your own: For most loans closed
after July 29, 1999, your lender must cancel private mortgage insurance
upon receiving your written request when the mortgage balance is
80 percent of the original value of the house. This is not automatic
as you must be up to date on all payments and have no other loans
on the house, such as an equity line of credit. The lender must
also be satisfied that the house has not declined in value. You
may have to provide an appraisal.
Automatic termination: Private mortgage insurance will be
cancelled automatically for most loans closed after July 29, 1999
when the mortgage balance reaches 78% of the original value of the
home. If you are not current on payments, private mortgage insurance
won't be cancelled until you become current. An exception is for
mortgages defined as high-risk. Private mortgage insurance will
automatically be cancelled at the mid-point of a mortgage, e.g.
15 years into a 30-year mortgage.
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