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The majority of homebuyers wholeheartedly believe in private mortgage insurance even if it is not the most popular form out there. Since most people usually cannot afford the normal 20% down payment, it is a way to circumvent the rules and allow for ownership by placing under 5% percent as a down payment.
Private Mortgage Insurance (PMI) is protection against your lending agency in the case you are unable to make good on your loan and default. This insurance is solely to protect the lender. Therefore, the premiums associated are paid by you. Most lending agencies stipulate that this type of insurance be purchased by their buyers because of the increased level of risk that those paying low down payment loans tend to have. It’s singular purpose is to lower your down payment mortgage.
Mortgage insurance premiums vary considerably, with the average usually between one-half and one percent of the loan amount. Of course, this price is contingent on the size of your down payment and the loan specifics of your case. These premiums are not necessarily tax deductible, unlike your mortgage interest.
Often confused by the uninformed buyer, private mortgage insurance and mortgage protection insurance are not the same, although they sound like it. In actuality, they are completely different forms of insurance products. Mortgage protection insurance is basically a policy meant to pay off the mortgage on your house should you die. On the other hand, private mortgage insurance protects the lender, ensuring they are able to recoup their investment, and allowing the buyer a smaller down payment. The two types of insurance should never be mistaken for each other.
If you are not satisfied with extra mortgage insurance payments, there are some ways to eradicate mortgage insurance completely:
If your home has experienced an increase in value recently after an appraisal, there is the possibility to end your mortgage insurance. When your home equity dips below the 80% loan-t-vale-ratio required by your lending agency, then you can get rid of private mortgage insurance. This must be done, however, after you have a certified appraisal from a notarized institution. Whether or not to get an appraisal lies on the specifics of your mortgage situation.
Making home improvements increases the value of your home, and places you closer to reaching the 80% loan-to-value-ratio level.
If you want to pay down your mortgage earlier it can make a noticeable difference over a period of years. Once your loan-to-value-ratio- hits below 80%, your PMI payments are no longer necessary.
The use of a 80/20 loan allows you to avoid private mortgage insurance. This way of using a piggyback loan helps you to avoid paying for a down payment directly from your own funds and there is the additional benefit of a tax deduction. One of the disadvantages is that your second mortgage normally has a higher interested rate attached to it, which take a dent into the PMI savings earned in the first place. An alternative is an 80/10/10 loan, where the remaining 10% is used for the down payment, which results in you paying less than a straight loan with mortgage insurance.
The Homeowner’s Protection Act (HPA) of 1998 allows you the ability to receive private mortgage insurance cancellation once you are at a 20% equity in your mortgage. Lenders also must cancel PMI coverage at 78%, the point at which the loan-to-value ratio is reached. There are, however, exceptions to these provisions. Liens on your property or defaulting on payments may mean you continuing PMI coverage.
It goes without saying that private mortgage insurance has allowed for families that otherwise would not have had the opportunity to own a home to do so. In this inflated real estate market, people need all the help they can get.