It’s almost impossible to listen to the radio or read anewspaper without encountering an ad for low- or no-down-payment home loans. Ifyou are considering buying a house or condominium, or refinancing your currenthome, it pays to understand the pros and cons of these high loan-to-value-ratiomortgages.
WHAT IS P.M.I. (PRIVATE MORTGAGE INSURANCE)? Unlessyou obtain a government-sponsored VA (Veteran’s Administration) or FHA (FederalHousing Administration) home loan for all or most of the market value of yourhome, you will probably encounter PMI.
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PMI insures conventional mortgage lenders, such as banks,credit unions and mortgage bankers, against foreclosure losses on the mortgageamount exceeding 80 percent of the home’s value.
For example, suppose you buy a $200,000 house or condo fornothing down with a $200,000 PMI mortgage. In addition to your monthly principaland interest mortgage payment, plus property taxes, you will also have to pay aPMI premium. If you default and the lender suffers a foreclosure loss, the PMIinsurer will pay the lender any loss exceeding 80 percent of the loan balance.That’s up to $40,000 in this example.
In other words, PMI protects mortgage lenders, notborrowers. But PMI enables “cash challenged” home buyers to purchasehomes for which they don’t have a down payment available.
With good income and good credit, home loan borrowers canobtain PMI mortgages for 90 percent, 95 percent, 100 percent and sometimes even103 percent (including closing costs) of the residence’s purchase price.
MAJOR DRAWBACKS OF P.M.I. But PMI is not free.Although PMI premiums vary, they typically add $50 to several hundred dollarsper month to the cost of a home loan, depending on the loan amount and theinsurer’s risk.
PMI is underwritten by private insurers specializing in thisunique insurance, which is arranged by mortgage lenders for their borrowers.
Another drawback is PMI premiums are not tax deductible likemortgage interest. For several years, PMI insurers have been lobbying Congressto make PMI premiums deductible, so far without success. Their argument is PMIhelps increase home sales and the national economy, promotes home ownership andraises construction employment. But the counter-argument is PMI deductionswould decrease income-tax revenue.
To overcome this non-deductibility drawback, a few mortgagelenders don’t charge PMI on their high-ratio home loans. Instead, they charge aslightly higher (tax deductible) mortgage interest rate, which includes PMI.But the disadvantage is the borrower pays the higher interest rate for the lifeof the mortgage.
HOW TO CANCEL YOUR P.M.I. In 1999, Congress enactedvirtually worthless legislation requiring lenders to cancel PMI premiums when aborrower’s loan-to-value ratio drops below 78 percent of the original loanbalance.
However, this law doesn’t consider (a) market-valueappreciation of the home or (b) a homeowner’s capital improvements, whichincrease the market value of the residence. The cruel result for PMI borrowersis it takes at least 10 years to meet the “78 percent” test by payingdown their mortgage balance.
Fortunately, most mortgage lenders instead have adopted theFannie Mae and Freddie Mac guidelines. These rules allow PMI cancellation afterat least 24 months of on-time mortgage payments when the borrower’s home equityis at least 20 percent as shown by a new appraisal from a lender’s “approvedappraiser” paid for by the borrower.
However, it is up to the PMI borrower to initiate PMIcancellation with the lender. If you think you are eligible to cancel PMI,contact your loan servicer.
You will then be informed you must pay an appraiser from thelender’s approved list. Typical appraisal fees are $300 to $400. That is a veryprofitable expense to get rid of your no-longer-needed PMI premium after thelender has virtually no foreclosure loss risk.
But some lenders refuse to follow the Fannie Mae-Freddie Macguidelines to cancel PMI premiums. Instead, they insist the home loan be paiddown below 78 percent of its original balance before canceling PMI. If you havesuch an uncooperative lender, the easiest way to get rid of PMI is to refinancewith another lender who does not require PMI.
REQUEST A P.M.I. REFUND AFTER CANCELLATION. Afteryour lender agrees to cancel PMI, or if you pay off a PMI mortgage in full, askthe lender for a partial refund of the current year’s PMI premium.
You may be entitled to this refund because lenders usuallycollect PMI monthly from borrowers but remit premiums annually to the PMIinsurer. The result is you may be owed a PMI balance for the unearned premiums,which are refundable to you.
But you must ask. Refund checks of $100 to $1,500 or moreare not unusual after PMI is cancelled or you pay off a PMI mortgage. If thelender refuses to account for your PMI premiums and you think you are entitledto a partial refund, the local Small Claims Court is a good place to claim yourPMI refund from the lender.
P.M.I. DOES NOT APPLY TO F.H.A. HOME LOANS. Manyborrowers who have FHA home loans erroneously think they pay PMI each month.They do not. Instead, FHA charges MMI (mutual mortgage insurance) or MI(mortgage insurance). When an FHA home loan is fully paid off, there might be apartial refund entitlement.
At the time of paying off an FHA mortgage, ask if you areentitled to a MMI or MI partial refund. If you don’t receive a refund checkwithin 45 days, contact HUD at 1-800-697-6967 or write to U.S. Dept. of Housingand Urban Development, P.O. Box 23699, Washington, DC 20026-3699. Or, on theInternet go to www.hud.gov/fha/comp/refundsand enter your exact borrower’s full name and FHA case number to see if HUDowes you a partial refund after paying off your FHA mortgage.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2006 Inman News