Do you recommend mortgage insurance? Mortgage insurance is insurance that covers a lender in the unlikely event of loss. If you are thinking of buying a home, you may want to consider investing in mortgage...
If you are thinking of buying a home, you may want to consider investing in mortgage insurance. The insurance would pay off the balance due on a mortgage if you are unable to for reasons such if you were to die before the mortgage is paid off or if you could not meet the monthly payments after becoming disabled. There are advantages and disadvantages to obtaining mortgage insurance, and there may not be one answer for everyone as to whether it is good or bad for the homeowner.
"Mortgage insurance is insurance that covers a lender in the unlikely event of loss," explains Doug Perry, who has worked in the Consumer Markets Division of Countrywide Home Loans for 16 years. "It is generally required when a borrower has less than 20% equity, which means the homeowner is putting less than 20% down. And if it is a refinance and the borrowers do not have 20% equity in the property, it is required. Mortgage insurance should be evaluated relative to other means of avoiding insurance, such as tax advantage. There isn't one set answer as to whether a borrower should or should not have mortgage insurance," Perry says.
An advantage of mortgage insurance is that it often helps borrowers to be able to buy a house with a zero percent, five percent, or ten percent cash down payment. For example, suppose you want to buy a house and use a loan administered by Fannie Mae or Freddie Mac at 103% of the cost of the house. It is even possible to finance the closing costs of a house that is less than $337, 700.
It can be expensive, however, to buy a house without a cash down payment. In fact, a mortgage lender will require insurance for the portion of the cost of your house that exceeds 80% of its appraised market value. With private mortgage insurance (PMI), however, seven nationwide PMI lenders will provide protection against foreclosure loss, if you default on a payment.
You should consult an expert to determine if mortgage insurance is for you.
"You should be working with a lender who reviews all the options and presents the advantages for each individual situation and assists the borrower in making the right decision," says Perry.
While mortgage insurance has been very beneficial for some people, enabling them to purchase a home they might not otherwise have been able to, it can have its drawbacks for others,especially those who have good credit and adequate income for low or zero down payments. The extra cost to you for PMI will be an extra one percent on your mortgage interest rate. It may still be a good deal, if you can afford the monthly payments. You should know, however, that the PMI portion of your monthly payment is not tax deductible as interest. Some lenders charge a higher tax-deductible interest rate, rather than imposing PMI premiums. If you want the biggest tax deductions, you should shop for high-ratio rates without PMI premiums.
The biggest disadvantage of a PMI is that it might be hard to get rid of when you no longer need it. Fannie Mae and Freddie Mac, the nation's largest owners of home mortgages, instruct their loan providers to cancel PMI's if the borrower has made payments on time, the loan has been in effect for 24 months, and the owner's equity is at least 20%. The equity is to be determined by a new appraisal, by an approved appraiser, paid by the borrower. Some lenders, however, want PMI protection even when equity reaches 20% and the chance of foreclosure is minimal.
Congress enacted legislation in 1999 to protect borrowers, which requires lenders to cancel PMI's when the borrower's loan-to-value ration drops below 78%. However, this won't happen for most homeowners until they have paid at least ten years of unnecessary PMI payments.
"Mortgage insurance, which is a product Countrywide offers, builds the insurance into the interest rate and allows the borrower to potentially get a tax write off," Perry says. "You can also combine second mortgages, such as home equity lines of credit or fixed rate second mortgages to avoid mortgage insurance also."
Some lenders will cancel your PMI after you have achieved 20% equity. If you have a lender who won't cancel your PMI (which can cost $50 to $200 monthly, even after you have 20% equity), you have options. Some borrowers sue their mortgage lender in Small Claims Court for a refund of unnecessary premiums. After months of default judgments against them, most lenders will cancel the PMI. You can also ask your lender for a refund of unnecessary PMI payments, and refunds of $100 to $1,500 often occur.
PMI's have helped many people buy a home who otherwise would not have been able to, but they are not for everyone. Consult an expert before determine if they are for you.
