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| What is Private Mortgage Insurance PMI and Mortgage Insurance Premium MIP?In 1997, the first time homebuyer's median home purchase skyrocketed to $108,000 over a median price of $92,000 in 1993 and 1995, an increase of 17 percent, according to the National Association of REALTORS®. The record home buying market, over 4.5 million homes sold this year, is being driven by first time home buyers, who accounted for 42 percent of home sales in 1997. With the starter home couple earning a combined income of $54,000, how are they financing these homes? The starter home is usually an economic "Hail Mary" pass for most first time homebuyers who scrape together the down payment from relatives, wedding gifts, 401K plans, savings bonds, insurance, mattress money, and any other sources their creativity can muster. But despite pulling out all the stops, not many can come up with the average $22,000 (20%) down payment required by most lenders. (MIP) Mortgage Insurance Premium and is the non-private government backed version of PMI that is associated with FHA backed home loans. Both MIP and PMI function alike but MIP costs can be higher although the loans can be easier to qualify for. The lender wants to limit exposure or risk to 80% of the home's value, or $80,000 on a $100,000 house. That means that the PMI must cover the remaining exposure. If a customer puts down 10% as a down payment, then the lender's exposure is at 90%, or $90,000 in financing. PMI insurance means that should a borrower default on the loan amount, the lender would be repaid the difference between the lender's exposure limit, in this case 80% and the buyer's down payment. The PMI would be on the difference of $10,000. As the monthly payments on the loan are made by the borrower, the loan is amortized down and the exposure for the lender is reduced. On a $100,000 home, the PMI payment can range from approximately $50 to $75. Typically the PMI it is rolled into the mortgage payment and listed separately on the mortgage payment papers, along with property tax and homeowner's liability insurance deductions. The down side of PMI is that it is a cost, and not tax deductible, but some PMI providers are finding a way around that, too. GE Capital Mortgage Insurance Company is among the innovators of new programs which allow payment of the PMI up front at closing. Since the approximately $2,000 cost is rolled into the mortgage loan amount, it therefore becomes tax deductible with every payment. There are even programs in place that provide a substantial refund for borrowers who choose to refinance within a few years, or who are transferred and must sell their homes. On a conventional mortgage, most traditional lenders expect a down payment of about 20 percent of the cost of the home, but with higher home prices and tax incentives for mortgage interest deductions, many borrowers are either unable or prefer not to put all their cash in a down payment. Sometimes people would rather have their cash in other kinds of investments such as stocks, retirement plans, or college funds for children, etc. No longer needing to accumulate 20% for a down payment because of PMI, you can move in with as little as zero to three percent down. With the tax advantage of your loan interest deduction, you can afford a bigger house payment than you would if you had to accumulate a large down payment. That means you can move in sooner and start enjoying the tax benefits and lifestyle immediately. The PMI payment is not something that the home owner will live with forever. When the value of the home has appreciated, or when the loan has been paid down sufficiently, the PMI payment can be eliminated. Legislation was passed that calls for automatic cancellation of PMI when certain criteria are met. Among other requirements, the loan must be current and amortized down to 78% of its original value. Some lenders may require that you have been in the home at least two years before you can ask them to drop the PMI. The borrower also has the option of requesting an appraisal when the market suggests the home may have appreciated enough to warrant canceling the PMI. Talk to a Realtor and ask for a comparable market analysis to see what homes are selling for around you before you go to the expense of having the home re-appraised." Ask me how you can put down 5% or less with NO PMI! |
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