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PMI explained

If your down payment on a home is less than 20 percent of the appraised value or sale price, you must obtain private mortgage insurance (PMI) with your lender. PMI protects your mortgage lender against any default on the home loan. Because of this protection you are able to purchase a home with a lower down payment.

Certain homeowners qualify for programs with reduced PMI. MyCommunity is an example of a program with reduced PMI.

It should also be explained that PMI Private Mortgage Insurance has been made tax deductible for many American households for new mortgages in 2007. The tax deductibility of mortgage insurance allows borrowers who qualify to more easily compare single mortgages with so called "combo loans" or "80/20" financing.

Borrowers whose household income exceeds the limit for tax deductibilty of PMI can still qualify for Lender Paid MI. Lender Paid MI (LPMI) means the lender is paying the MI premium as part of your increased interest rate.

PMI, also referred to as Private Mortgage Insurance, is a type of insurance that protects the lender against mortgage loan defaults by customers. Understand, that this insurance does not protect you as a homeowner in any way. PMI is not going to help you save your home if your home is foreclosed upon and PMI is not going to protect your home or it's contents if your home burns down, a tornado hits your house or any other disaster happens. Hazard insurance, also referred to as homeowners insurance is the insurance that protects you in case of fire, theft, etc... PMI will simply help you buy a home or refinance your home with little to no equity in your home. It protects the lender and gives them more protection on their mortgage loan to you.

Another option to private mortgage insurance is called Lender Paid Mortgage Insurance. This means that the lender will give you a slightly higher rate instead.

Generally speaking, PMI drops off of your monthly payment once you have paid down your mortgage loan to 80% of the home value. In some cases, you will need to request in writing that the PMI be removed at this point. To understand the particular terms your lender has written into your mortgage, carefully review your mortgage disclosures or consult a mortgage loan specialist.

As of October 1, 2007, PMI guidelines for interest only loans and for borrowers with lower credit scores have become highly restrictive. This has pushed many borrowers who would have used conventional financing to turn to government insured FHA loans.

The Homeowners Protection Act of 1998 established rules for when a lender must cancel mortgage insurance. You can request the mortgage insurance to be dropped when your loan balance reaches 80% of the original property value if your payments are current. In most circumstances the lender must remove the mortgage insurance even if you don't request it when your loan balance drops to 78% of the original property value.

The Homeowners Protection Act (HPA) applies to mortgages that closed after July 29, 1999. To qualify for the removal of mortgage insurance under the Homeowners Protection Act you must be current on your loan, not have had any payments over 30 days late in the last year and no payments over 60 days late in the last two years. Additionally, you may not have any second liens on the property like a home equity loan.

If you closed on your loan before July 29, 1999 and do not qualify for the requirements lenders must follow under the Homeowners Protection Act or if your home has appreciated significantly since it was purchased, you still may be able to get a lender to remove the mortgage insurance on your loan. Contact your lender and ask them if they will remove the mortgage insurance since your home is worth more than when you purchased it. They may agree to drop the mortgage insurance if you pay to have the house appraised to show that you have more than 20% equity.

If you are purchasing a home and have less than 20% to put down you still may be able to avoid mortgage insurance. To do this you take out two loans. A first lien for 80% or less of the value of the home and a second for the remaining amount you want to borrow. This strategy known as a "piggyback loan" can have other advantages also.

Say you are purchasing a home with less than 20% down and you need to borrow more than the conforming loan limit. Instead of getting a "jumbo" loan and paying mortgage insurance you may be able to divide the amount you need to borrow into two loans with the first lien below the conforming limit and less than 80% of the value and a second lien for the remaining amount. Besides avoiding mortgage insurance you may get better terms on a "conforming" loan than a "jumbo" loan.

Many of the PMI companies control the loan to value or credit score requirements that lenders can loan on. In 2008, several major MI companies are increasing their score requirements to insure 100% loans.

DISCLAIMER: The information contained in this article on 'PMI explained' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.

PMI explained

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