Private mortgage insurance is actually designed to benefit the lender--like most lending practices--and may go too far if borrowers don't proceed with caution. How can private mortgage insurance be a benefit to borrowers and when does it become a burden? Some of the answers to these questions can be found in the following article.
What is Private Mortgage Insurance?
Private mortgage insurance is insurance that is required of borrowers that cannot afford to pay a 20% (or more) down payment. The insurance is designed to protect lenders from the possibility of default and costs on average about $50-80 per month. The insurance can be beneficial to borrowers--as you will notice in the next paragraph--but may become more of a burden than a benefit if borrowers do not proceed with caution.
How Will Private Mortgage Insurance Benefit the Borrower?
Private mortgage insurance allows low income borrowers--or borrowers who do not have a large amount of readily available income--the chance to purchase a home when they can only afford to put down a very small percentage on their purchase. This allows them to not only live in a home, but to build equity and enjoy the benefits that come with homeownership. These benefits are great and can be a wonderful way to purchase a home however there are some things that potential borrowers should watch out for, so that their benefits don't turn out to be their burdens?
The Downside to Private Mortgage Insurance: What You Can Do to Avoid It
The downside to private mortgage insurance is that you can get stuck paying it for much longer than you might have expected. In 1998, the Homeowners Protection Act demanded or mandated that every homeowner who paid his or her mortgage down to the 80% level would have the right to request that his or her private mortgage insurance be discontinued. The law also mandated that once the owner had paid the mortgage down to the 78% level, then the discontinuance of the private mortgage insurance must be automatic.
It seems like the Homeowners Protection Act has taken care of a lot of headaches, right? The answer to that question is that YES, it has worked to protect homeowners, although the law is only applicable to those who make a purchase of their home on or after July 29, 1999. So, what are the options for homeowners who purchased their homes before that date? And what about those homeowners who are working to pay down to the 78% level, but find that it is taking a long time (i.e. around 10 years) to do so? Some experts say that rising home prices may be the answer to some homeowners' woes.
Rising Home Prices: An Answer to Your Private Mortgage Insurance Woes?
This may not be the best solution for you and your family but many homeowners find that taking advantage of the rising costs of homes is the way that they can get rid of their private mortgage insurance. How do they do this? First they come up with a small down payment and secure a loan with private mortgage insurance. Then, after they own the home for a little while and the home rises from about 12 to 20% in value, they can refinance their home with a typical mortgage and get rid of their private mortgage insurance. This doesn't mean that the rising prices for homes are a good thing. Many homes will often be unaffordable even with mortgages offered with private mortgage insurance. However, the 'rising home price' option does exist and borrowers should always be aware of their options.
