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Homebuyer's Guide to Private Mortgage Insurance

mortgages, mortgage insurance, mortgage loan, private mortgage, private mortgage Insurance,

Private Mortgage Insurance

When purchasing a home, buyers deal with experts in the field who throw a barrage of numbers and letters at them like rapid gunfire from an assault rifle. The process in and of itself is comprehensive and most buyers rarely have all the knowledge they need to be picky about what type of financing they receive for their new home. Buyers tend to find it easier to accept a loan for which they are approved rather than iron out specifics to save them money in the long run. One of the most common though not always necessary costs buyers pay is called Private Mortgage Insurance (PMI).

What is PMI and Why Do Lenders Charge It?

The title PMI can be somewhat deceptive, giving you the idea that it would somehow benefit you in a tragic event or situation. The fact of the matter is that PMI is a protection paid for by the buyer of a home, but its function is to protect the bank that provides the mortgage loan for the house. For example, if you buy home and finance that purchase through Bank A, they are expecting full repayment of that loan, as well as the interest that comes along with it. Should you lose your job or become incapacitated and unable to pay the mortgage, the bank would foreclose and probably resell the home for the balance that you owed. In order for Bank A to not lose any more money, PMI pays for the costs incurred during foreclosure. Should the bank not need to foreclose on the house, you’ve just paid Bank A loads of interest and PMI payments every month. The reason PMI is assigned and the responsibility of the borrower is all based on risk. Anytime a mortgage loan is created for more than 80% of a home’s appraised value, there is an increased risk that the lender will not receive full repayment of that loan.

Does Every Buyer have to pay PMI?

In years past, it was necessary to provide a 20% down payment in order to secure a mortgage loan for a home. As the economy has twisted and turned with the changing times, the lending industry has adjusted so that 100% financing is now available. It is definitely in a buyer’s best interest to structure their mortgage for the best, most affordable payment they can obtain. But don’t look for every lender to tell you that. Ideally, you would apply for a mortgage with 20% down payment. If that is not available through your own funds, try a concept called “creative financing.”

What is Creative Financing?

The most popular of creative financing is the 80/20 split loan. The other two most popular are the 80/10/10 and the 80/15/5. In each scenario the 80 represents a first mortgage loan for 80% of the appraised value. In each scenario the second number represents a home equity (or second) loan against the property you are buying. The third number, shown in only two of these scenarios represents the buyer’s down payment. Interest rates can be higher on these second mortgages because of risk and lender-paid PMI. However, the rate should not be variable or adjustable. Nor should it come with a pre-payment penalty that would charge you a fee to pay off the loan early. The payment amount will be similar/slightly lower than that on a loan with PMI. The benefit of having that second mortgage is that all of your payment is dedicated to paying off your mortgage loans and the interest on both is tax deductible.

Time is Money

A mortgage is one of the largest investments you will ever make. Experience is not always on a buyer’s side, and the mortgage lending industry is an industry where you can’t always believe what you hear. Even though it may seem easier to go with the flow and just sign where you’re told, resist the temptation. Spend some extra time, ask all the questions you can think of and in the long run avoid unnecessary expenses like PMI. Spend some time to save some money; It’s definitely worth it.

Original Article by--Katherine Martinez
Published: 2006-04-06
Author: Katherine Martinez

About the author or the publisher
Katherine is a graduate of University of the Incarnate Word in San Antonio, TX. She receved her BA in Interdisciplinary Studies in 2001. She has since worked in the banking industry, in credit card service and disputes. She is now working as a mortgage counselor. Despite her career path, Kat has always loved writing. She hopes to refine her skills in the freelance arena while becoming an english teacher. She has been published in her company newsletter and local newspaper's op/ed column.

Source: ArticlesGratuits.com - Free Articles



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