What Is PMI???

What Is PMI?

Written by Cassie Hansley, Realtor® with Wilkinson And Associates in Lincolnton.

Check My Weekly Article out In The Whats Up Shopper

If you have been thinking about buying a home and you have done any kind of research, then you have probably heard the term PMI. Well, just what is PMI?

PMI is an acronym for Private Mortgage Insurance. It is an insurance policy offered by private companies to protect lenders on their investments. If you default on your loan and the lender has to sell the house to recoup their lost money, the PMI coverage gives them a margin to cover such things as legal fees, closing costs, discounts to the new buyer, or Realtor commissions. The PMI policy is used, in other words, to cover the amount of equity that you would have otherwise paid into the property if you had made a full 20 percent down payment. This may be hard to follow so just stay with me.

Traditionally, when you went to buy a home, you were required by the banks to put at least 20% down on your home no matter what your credit score was. It was considered to be a commitment by you to the bank that you were serious about buying a home. You are able to manage money and therefore you are able to make your monthly payments and be a responsible homeowner. As time went by and more and more banks began to compete for new customers, the lenders started to become less strict about their down payment requirements. As you can imagine, this lead to more loan programs that were created for lower down payments. Likewise, the borrowers had less invested into the home from the beginning, so, if times got tough, many homeowners with less invested would choose to walk away from their home. As a result of higher foreclosures, lenders had to find a way to insure their investment. The result: Private Mortgage Insurance.

So how exactly does PMI protect your lender? From the lender's perspective, PMI is a necessary protection. It insures the first 20% of the amount of money that was loaned on your home. If you put 5% down and financed 95%, then the PMI would cover the 15% of your loan and so forth. Keep in mind, the insurance is based on the amount of money you borrow and NOTthe value of your home. However, when you have 20% equity in your home, you can have the PMI dropped completely from your monthly payments by having a new appraisal completed. NOTE: Most lenders will require you to keep the PMI for at least two years.

So how does this help the new homebuyer? If lenders are willing to lend you money with little or no money down, then you don't have to save that 20% and let's face it, home values have increased much faster than our income levels within the past thirty years and it is much tougher to save for a home than it used to be. So, with PMI, you are more likely to be approved for a home mortgage.

But hold on a second before you pick up that phone and call your lender. You need to know how this will affect your monthly payments. The PMI will be broken down as a percentage and you will be required to pay it each month with your monthly house payment. The percentage that you pay is based on your credit history up to that point and is ultimately decided by the particular insurer that will carry the coverage on your loan. Please take note that there are loan programs that do not require PMI but you may end up paying a higher interest rate for the full term of your loan instead of having the option to drop the premium. Even FHA programs require borrowers to pay an up front mortgage insurance and a monthly premium.

So now, home buyers have an option when buying a home. You can save up the money to put down, or you can opt to pay the PMI each month until you reach the drop out point. It truly does help new home buyers get into their firs home. The silver lining of this "necessary evil" is that it allows thousands of renters each year achieve the American Dream of homeownership.

How to Avoid PMI Payments

• If you make at least a 20 percent down payment, you don't have to pay for PMI.
• Another way to avoid PMI is to pay down the principal balance on your loan until it is 80 percent or less and then request your lender to terminate PMI. (Keep in mind that with a typical fixed-rate 30-year loan, it might take 10 years to reduce your balance that much.)
• Financial experts recommend that homeowners keep track of their outstanding balance, so that as soon as the 20 percent rule is satisfied, they can discontinue PMI payments to save money.
• In some cases you can use market appreciation to avoid PMI. In other words, if you owe less than 75 or 80 percent of the appraised value of your home, you may be able to discontinue PMI. Check with your lender or real estate attorney to determine exactly what guidelines apply to your mortgage.
  
  Tax Incentives For 2007
• Hopefully by now you have figured out how PMI basically works. But just to complicate matters, Congress and the Internal Revenue Service have thrown a new feature into the PMI calculation, for 2007. The good news is that it involves a tax deduction that might save you a considerable amount of money.
• Congress has passed legislation that will make 2007 PMI payments tax deductible. They may extend the deduction after they review the results of this trial period experiment, but that remains to be seen. Meanwhile, if you have been toying with the idea of taking out a mortgage or refinancing, this may be the best year to go ahead and do it.
• If you borrow 100 percent of the financing to buy a $300,000 home and the PMI charges are in the $180 range, that adds up to a potential 2007 PMI deduction of more than $2,000. The PMI premium is 100 percent deductible if your household adjusted gross income does not exceed $100,000.

Looking to Buy In Lincolnton, North Carolina???

Contact Cassie for information on ALL HOMES AVAILABLE in Lincolnton, North Carolina and Surrounding Areas.

If you have any questions about the process or where to get started, please feel free to contact me ANYTIME at 828-234-3106.

I Represent People Not Properties!!!

If you want to find out how you can buy a home in Lincolnton, Lincoln, Catawba, Iredell, Gaston, and Mecklenburg Counties, Please feel free to get in contact with me at 828-234-3106 ANYTIME or you can email me at cassiehansley@yahoo.com.

If you would like to start your search NOW, please visit http://www.lincolntonhomefinder.com/ to begin looking for YOUR HOME. I look forward to hearing from you and discussing your situation and what you are looking for.

Lincolnton, NC, Lincoln, Gaston, Catawba, Cleveland, Iredell, & Mecklenburg County!!

Access to all homes on the Market!!! Log in to thehomefinder to start you search on my website at http://www.lincolntonhomefinder.com/.

Thinking of retiring, a second home, investment, a lifestyle change , First Time Home Buyer?
We've got it and I am here to assist you!
Give me a call, today...

Direct: 828-234-3106