Posted: Sat Jul 08, 2006 10:36 am Post subject: Private Mortgage Insurance
Private Mortgage Insurance
Insurance the buyer carries to guarantee that the lender is paid off if the buyer defaults (fails to pay) on a mortgage. This is different from homeowner's insurance. It is generally required for all mortgages with less than a twenty percent down payment. The exact amount depends on the amount of the loan and the size of the down payment.
Mortgage insurance is a form of insurance that supports the lender if the borrower fails to repay the loan irrespective of the mortgage being a government mortgage or conventional mortgage. The cost of the Mortgage Insurance is determined by the monthly payments made by the borrower. The cost factor comes into play if the loan has an LTV of 80% or greater ie. when the down payment is less than 20% of the home's value. This is popularly known as the private mortgage insurance since a private institution backs them instead of the federal government. It can also be issued by government agencies like the Federal Housing Administration (FHA). The type of the mortgage insurance determines whether a percentage or the entire mortgage loan would be covered by the insurance.
Lenders Mortgage Insurance
Lenders mortgage insurance is same as the Private mortgage insurance. The insurance provides the protection to the lender when the mortgagor is not able to repay the loan and the lender couldn't able to realize the costs even after closing the loan and selling out the mortgaged assets.
Last edited by lakemen on Thu Jul 17, 2008 9:31 am
The Private Mortgage Insurance remains indispensable till the homeowner acquires enough equity on the property. The private Mortgage Insurance plays an important role in the mortgage industry. It protects the lender’s interest, when the mortgage defaults.
The Private Mortgage Insurance allows the homeowner to qualify for a mortgage with as low as 3%-5% of down payment. Hence, in a way it’s helping you to obtain a property faster.
The cost of PMI varies widely with the value of the property, area/locality and the amount of the down payment.
When can you drop the coverage?
Technically, you should have the choice to drop the policy anytime you want. But the lender will not let you do so, until you accumulate 80% equity in the house. Hence, you can actually drop the coverage once your loan is paid down to 80% of the total loan amount.
However, the recent amendment in the Homeowners Protection Act ensures that the PMI will get terminated automatically once the homeowner acquire 22% equity based on the original price of the house. But you have to remain current with your mortgage payments. Also the law excludes properties qualify for FHA and VA loans and the properties with lender paid PMIs.
In addition to the above scenario, there are few additional situations that may prevent you from dropping the PMI early enough.
if your mortgage falls into the high risk category the lender may require you to maintain the PMI through the entire life of the mortgage.
if you have other liens on the property, the lender may ask you to maintain the PMI to ensure his interest.
if you have defaulted in your mortgage payment for couple of times in the past. This too can trigger the necessity to keep the private mortgage insurance on the property.
Hey PAhomeowner, if you have obtained 20% equity on your home, you can cancel the private mortgage insurance.
Now, you can ask how to determine whether you have achieved the target or not?
Well, if you have already paid 20% of the mortgage loan, you have attained the eligibility level.
Another way to determine it is by dividing the mortgage amount that you owe by the value of the property and multiply the value with 100. This too will also give you a fair idea on how much equity you have acquired on your home.
