Private Mortgages (PMI)
Private Mortgage Insurance also known as PMI or Private MI is a means for you to place a down payment on a home sooner than without a private mortgage insurance. Rather than wait to save 20 percent down payments on a home you may acquire a private mortgage insurance and pay 5 percent down.
Chicago Title and Trust study revealed first-time home purchasers in 1994 worked three years for a down payment which accounted for an average down payment of 13.7 percent. It further stated that first-time buyers would need to take an additional four-and-a-half years to save for the requisite 20 percent down payment.Thus private mortgage insurance allows you to purchase your home sooner and one in which to live in.
There is a correlation between the amount borrowed and the default of the loan. In other words, the more one borrows for a loan the chance of defaulting on the loan increases. Banks and lending institutions use this logic to insure against probable losses; therefore, most lenders require private mortgage insurance on a conventional mortgage. The private mortgage insurance is a guarantee protecting the lender from the defaults on loans. If you choose to not acquire a private mortgage insurance than you will typically require a 20 percent down payment.
With private mortgage insurance, a first-time purchaser allows them to place a considerably smaller down payment. For instance, to purchase a $50,000 home without private mortgage insurance you would typically need $10,000 accounting for 20 percent down payment. With private mortgage insurance you can place $2,500 down payment for a $50,000 home accounting for a 5 percent down payment. Or with a $10,000 down payment the private mortgage insurance can allow you to purchase a $200,000 home accounting for 5 percent down payment.
Herein lies the purpose of a private mortgage insurance. Now you may purchase your first home without extending the time-frame to save for a large down payment and opening up the opportunities to view homes you otherwise would not have been able.
Mortgage Guaranty Insurance Corporation. "Understanding Private Mortgage Insurance." Pamphlet.
http://www.mgic.com/
Cost of Private Mortgages
So what are the costs of a private mortgage insurance? Should you place your money in a larger down payment to avoid the costs of a private mortgage insurance or should you invest it in other avenues providing you have this extra money lying around?
Private mortgage insurance costs around .79% of the balance per year for the first 10 years then it declines to .20%. So with this in mind let's take a look at an example. Suppose we purchase a $100,000 home with 30-year fixed rate mortgage at 7.5% and zero points. We have can borrow $80,000 or 80% of the purchase price with no private mortgage insurance or we can borrow, say, $95,000 or 95% of the purchase price with private mortgage in...(more on Cost of Private Mortgages)
Getting rid of Private Mortgages
Private Mortgage Insurance (aka PMI) is a requirement for mortgage loans with an LTV (loan-to-value) ratio of 80 percent or higher. Cash-out refinancing may have private mortgage insurance premiums for LTV ratios of 75 percent or higher. For example, if you purchase a $200,000 home and your down payment is less than $40,000 then you will have to pay a private mortgage insurance premium.
The private mortgage insurance essentially insures the lender from losses of loan defaults. In other words, if you are suddenly unable to pay your mortgage loan than the lender is insured from this financial loss. Statistics provide evidence that people who borrow greater than 80 percent to purchase ...(more on Getting rid of Private Mortgages)
Avoid paying Private Mortgages
To avoid paying private mortgage insurance you have to achieve a loan-to-value of 80 percent or less. However, you can do this even with down payment of less than 20 percent. How? Many lending institutions offer a loan called an "80/10/10." In this case, you are given two loans instead of one. Your first mortgage is 80 percent of the home's value and the second mortgage is 10 percent of the home's value and then you are required to place a 10 percent down payment. Essentially, this loan allows you to have a smaller down payment of 10 percent and you will receive the benefit of mortgage interest tax deductions. The lender will offer a first loan of 80 percent of the home's value which i...(more on Avoid paying Private Mortgages)
Mortgage Interest Deductions
Currently, mortgage interest on first and second homes may be a tax-deduction if the total value is less than $1.1 million. This is conceived as a good route to decrease tax expenses at year end. An example of owning a home after taxes with the mortgage income tax deduction included follows:
Home Purchase Price - Down Payment....$200,000 - $20,000 = $180,000 (5% down payment)
Amortization..........................30-year Fixed Rate Mortgage at 10%
Property Tax..........................1.4% of assessed home's value = $2,800
(note: assessed home value may be less or more than the purchase price of the home.
We make the assumption that the appraised value of home and p...(more on Mortgage Interest Deductions)
Basics of PMI and Housing & Urban Development Rules
Many people think a Private Mortgage Insurance (PMI) is a life insurance policy for mortgages in that the mortgage would be paid in the event of the policy holder's death. This is surely untrue!
Private Mortgage Insurance is an insurance whereby a lender may approve a mortgage accouting for greater than 80% of the appraised value of the home. This insurance is used in the event the borrower defaults on the mortgage. In other words, if you have less than 20% down payment on a home then you will need a Private Mortgage Insurance. It is statistically accurate to state that people who borrow more than 80% of the home's value will have a significantly greater chance on loan defaults.
O...(more on Basics of PMI and Housing & Urban Development Rules)
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