New statistics suggest that consumers are taking advantage of Private Mortgage Insurance to help them purchase better quality housing without putting down large sums of money.
Private Mortgage Insurance (PMI) is specialized insurance which is required by lenders on mortgages which are for more than 80 percent of the properties value. When a homeowner is not able to put don more than 20 percent as a deposit on their new home, then the lender ill require that they fork out cash for PMI.
One of the main reasons behind lenders’ insistance on homeowners purchasing PMI is so that the lender is protected in the event of the borrower defaulting on their mortgage.
However, consumers also benefit from this as it allows them to purchase a better home than they would have without the larger don payment. It is not unheard of for individuals to successfully purchase a home with a deposit of just three to five percent.
PMI is regulated by the Homeowners Protection Act (HPA) of 1998 which requires lenders to discontinue Private Mortgage Insurance at the borrower’s request once they have paid down the mortgage to within 80 percent of the agreed value of the property.
The homeowner must also display a good payment history. Once the loan reaches 78 percent of the total balance owed, the lender is required to automatically terminate the Private Mortgage Insurance. In the case of high risk loans, the automatic termination occurs at 77 percent. Lenders are also required by the HPA to provide borrowers with access to certain disclosures and information.
PMI can help consumers to purchase a better home with a smaller down payment, however, it is important to remember that the consumer always pays in the end. Hen factoring in the cost of PMI, the cost of the property may exceed it’s original value.
At the end of the day, even although consumers are using Private Mortgage Insurance seemingly to their own benefit, it was primarily designed to help lenders and not borrowers. If you do decide to make use of PMI, you must be vigilant and do whatever you can to pay down the mortgage balance so that you will be able to remove the PMI as soon as possible. This will stop you from paying more than you should for your new home.