Mortgage Insurance Basics

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Mortgage insurance, commonly referred to as PMI or private mortgage insurance, plays a small but important role in our real estate economy. Because the insurance protects investors, it translates into more affordable and accessible loans for those Americans wanting to buy homes.

Private mortgage insurance-or PMI, as it's commonly called-is typically required by lenders when homeowners make down payments of less than 20 percent of a home's purchase price. The borrower pays PMI costs, even though this unique type of mortgage insurance doesn't pay claims to homeowners. Instead, it pays lenders if the borrower defaults, as a way to compensate for the lender's losses and the fact that the lender didn't require a hefty down payment up front. Without this mortgage protection insurance, lenders would have to shoulder more risk. Therefore, consumers get the indirect benefit of greater loan affordability when this kind of home mortgage insurance is in place.

Is PMI worth it?

To determine whether it's worth it or not to pay the additional cost of this rather quirky home mortgage insurance, you should get a firm mortgage insurance quote from a prospective lender. Then, compare the cost of PMI to the cost of coming up with a larger down payment, keeping in mind that if your funds don't go toward a down payment, they can be invested elsewhere. Carrying private mortgage insurance usually adds about $50 to $75 dollars a month to one's mortgage payment. But paying a smaller down payment adds to the overall amount of the loan and can be significantly more expensive over the lifetime of a typical mortgage. The math can get complicated in a hurry, so borrowers should have their lenders crunch the numbers with a mortgage insurance calculator and weigh all the various scenarios.

When mortgage insurance ends

By law, a lender cannot demand mortgage protection insurance from a borrower once the equity in the home reaches 22 percent. So, if you start off paying PMI and your equity rises to that level, you can drop those payments and enjoy the savings. Those paying for mortgage insurance can also benefit from a temporary tax break that makes PMI payments tax deductible as part of an economic rescue plan that went into effect at the end of 2007.

On the other hand, consumers may be able to skip the arithmetic and forego the mortgage insurance calculator exercises completely, thanks to the current mortgage crisis. Many banks are updating their loan requirements and stipulating that borrowers fork over 20 percent down payments under all circumstances. Whereas two years ago, it was common for banks to lend 100 percent of the value of a home, many cut that loan-to-value ratio to 90 percent in reaction to their own financial woes. As a result, some buyers can expect to pay 20 percent down on their loans regardless of what they prefer, and that means they won't have to worry about PMI-whether they like it or not.

Insurance and Your Second Home

A second home is not necessarily "home sweet home" when it comes to homeowner's insurance. With house number two, you'll discover the need for more insurance, priced at a higher cost than the premium for house number one. How much higher depends on how closely you follow these money saving tips.

People fortunate enough to own a home away from home often complain about a second residence being more trouble than it's worth-especially when it comes to homeowner's insurance. The increased premium is attributed to the fact that owners don't spend as much time at their second home as they do at the first. In the insurance company's eyes, that leaves the residence more susceptible to burglaries and fires.

Even though that fact is hard to dispute, there still are ways you can save on your insurance bill.

Someone to watch over your home

The thought of having to pay a claim on a burglary scares the wits out of an insurance company. Abate their fears by installing an alarm system in your second residence. It may require some upfront money and an ongoing monitoring fee, but you could save upwards of 20 percent on your insurance bill. You'll save even more if your home is in a gated community.

Consolidate for the rebate

Use the same agent on your second home that you use on your primary residence. You'll generally receive a discount on your policy when you have the same company insure multiple properties. Throw in an umbrella policy and car insurance, and your premium should decrease even further.

Renting out your summer home

When it comes to insuring a summer rental, you can't win. Insurance companies don't like the idea of you leaving your house all by itself, so they'll increase your rates. If you decide to rent it, they don't like that idea either, because tenants tend to mistreat property, or at least don't treat it as well as the real owner would. One way to offset the costs is to require any tenants to supply their own furnishings, thereby reducing the insurance company's liability.

Open the umbrella

In our litigious society, an umbrella policy is a necessity-second home or no second home. These provide a hefty amount of general liability, usually around $1 million, and protect you from all types of lawsuits. Considering your potential risk exposure with a second home-especially one that you rent out-such policy is essential. Contact your agent to determine the proper amount of coverage for your situation.

The ability to retreat to that home away from home is a true blessing for people who own a second residence. However, insurance companies will do their best to spoil the fun. To soften the blow of a higher insurance policy, do what you can to lessen your insurer's risk exposure. Protect your second home like you would your first, and your premiums will reflect your extra effort.

Understanding Private Mortgage Insurance

Private mortgage insurance is back in vogue. Do you know how it's going to affect your home purchase or refinance?

Some things in life can't be easily explained, like why the L.A. Lakers routinely lose to the Portland Trailblazers at the Rose Garden. Thankfully, private mortgage insurance (PMI) -the bane of homebuyers on a budget-isn't one of life's inexplicable mysteries.

Changing times

In the mortgage lending heyday, lenders would bend over backwards to help borrowers avoid PMI. Now, it turns out, that was a bad idea. Lenders, struggling with too many defaults already, have a renewed interest in requiring you to maintain a mortgage insurance policy.

This means that you need to know what PMI is, and the impact it has on your home purchase or refinancing plans. Mortgage insurance protects your lender in case you default on your mortgage loan. This protection is in addition to the protection gained when the lender takes a security interest in your home. Lenders face the most risk when there isn't a sufficient cushion between the home's value and the outstanding loan amount. When this cushion is too small or even negative, lenders aren't able to recoup their funds after absorbing the costs of foreclosure. For this reason, they require PMI when your loan balance exceeds 80 percent of the home's appraised value.

If your lender requires you to carry mortgage insurance, you'll have to pick up the tab. The premiums will be added to your monthly mortgage payment, which limits your home-buying budget or reduces your savings when you're refinancing to a lower rate.

Mortgage down payment options

You can avoid PMI by scraping together a 20 percent mortgage down payment. Or, if you're refinancing, you can limit your loan amount to 80 percent of your home's appraised value. Either scenario might require you to hand over cash you don't have. If so, consider whether you can borrow some of the needed cash from your family or employer.

Managing PMI

If you can't get around your lender's PMI requirement, you should at least know how to manage the extra expense. First, ask your lender to provide you with a few different quotes. If your lender has only one option, shop your entire loan to other lenders.

The next step is to know when you can request cancellation of your PMI. The Homeowners Protection Act of 1998, enacted the following year, gave homeowners the right to request PMI cancellation once the loan balance is less than 80 percent of the home's value. In years past, this usually happened through home value appreciation; in today's housing climate, however, that may take a while. You can expedite the process by making additional principal payments on your mortgage. Be aware that your lender will require an appraisal to verify that you no longer need the PMI.

Although private mortgage insurance can throw a wrench in your home financing plans, the program itself isn't terribly complicated-not at all like the Lakers' triangle offense.

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