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Private Mortgage Insurance - Types - Benefits - How Long Will You Have It
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Given the decline of the combo loan, or the 80/20 or 80/10/10 loans, and the upsurge of Private Mortgage Insurance (PMI), let us look at the types of PMI, how long you have to have it, and the benefits of each type. This article is Part 2 of a 2 part series on PMI. See Part 1: Private Mortgage Insurance - Explained - Little Bit Of History - Why You Need It
How long do you have to have PMI? The general rule of thumb on how long do you have to have your PMI on your mortgage is until your 1st mortgage balance is less than 80% of the appraised value of your home. You must also keep your PMI for a maximum of 2 years from when you get it no matter what your balance is or the value of your home. So let us break this down some more. If you purchase a home on January 15, 2008 for $200,000 and you get a mortgage for $200,000 (no down payment) you will have to continue to pay your PMI until at least January 15, 2010 or after until your mortgage balance gets below $160,000 if your home value is still exactly $200,000.
If you have had your mortgage for at least 2 years and you have PMI, they you might be eligible to have the PMI removed. Your mortgage company will probably not contact you about your PMI possibly being removed. Take it upon yourself to contact your mortgage and even the PMI company to find out what the procedure is to have your PMI removed. Most likely you will have to have an appraisal on your home to determine your property's value. You will have to pay for this appraisal. Once the appraisal is complete you will have to submit the appraisal to either your mortgage company or the PMI company for evaluation. Depending on their review your PMI will be reduced, cancelled, or kept the same.
What are the different types of PMI? There are generally four types of PMI: Monthly, Lender Paid, Lump Sum, and Split Payment.
• The most common type of PMI is the Monthly. This type is paid every month in your mortgage payment as part of your escrow payment.
• The next popular type is the Lender Paid. You will see this as a slightly increased interest rate charged by your mortgage lender. If normally you would be charged 6.25% for your first mortgage and you took the Monthly PMI option, then in the case of the Lender Paid you might be charge 6.5% but you would not have a monthly PMI payment through your escrow payment.
• The next type is called Lump Sum. The Lump Sum PMI is a policy that is paid all at once when you get the policy when you purchase your home and get your mortgage. You will not have a monthly payment in this case.
• The last type of PMI is called Split Payment. This policy type is when you pay a portion of the premium at closing and then you make a smaller monthly payment each month with your escrow payment.
What are the benefits of PMI? In general, from your standpoint as a homebuyer, you can buy a bigger house because the lender can offer you lower interest rates. You can also keep your cash in the bank versus having to use it for a big down payment. Let us look at the benefits of each of the 4 types of PMI policies.
• Monthly: for qualified borrowers your monthly payment is tax deductible (see Part 1 of this series); less money out of your pocket at closing since your first premium payment is not until your first mortgage payment; this policy can be cancelled when you reach 20% equity with your mortgage balance.
• Lender paid: your monthly payment is 100% tax deductible because your payment is included in the interest rate that you are charged by your lender (the negative of this policy is that it cannot be cancelled unless you refinance the mortgage).
• Lump sum: this policy is great when you are able to negotiate to get the seller to pay you some of your closing costs as an incentive to buy their home. This is very important in a buyers’ market. This policy allows a lower monthly payment since the premium is paid completely up front. You may be eligible for a refund of the premium, but you will have to check with the policy issuer to find out the parameters of refund eligibility.
• Split payment: the benefit of this policy is that it allows for a lower monthly payment and it allows for the seller to contribute to your closing costs. This is similar to the Lump sum option above.
On your mortgage statement, you will see an escrow payment if you are escrowing your taxes and insurance (hazard insurance and mortgage insurance if applicable). Your monthly mortgage statement will show a breakdown of each of these payments.
Your PMI policy will be determined based on your credit rating, asset, and income profiles. What this means is that the higher risk you are (lower credit scores, higher debt ratio, less money for down payment) the higher premium, thus a higher monthly payment you will pay. It pays to have better credit, lower bills, and more money when you are going to purchase a home, but PMI allows for weaknesses in each of these qualifying categories so that you can affordably buy a home with no money down.
Written by GetPreQualified.com's editorial staff
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