Private Mortgage Insurance or PMI
Private mortgage insurance is explained here. Read on…..
Lenders always want 20% down when you purchase a home. There was a time- not long ago- when it was impossible to purchase a home unless you had 20% for a down payment.
The reason that lenders have always asked for 20% down is because, in the case of foreclosure, the lender almost always loses quite a bit of money. First of all, there are all of the missed payments from the original borrower; and in addition, the bank needs to take possession of the house and incur all of the costs necessary to try and re-sell the home. Typically, homes that are foreclosed upon are sold at auction, and banks usually collect less than the home’s full value. If a bank were to lend you $97,000 for a $100,000 home and you did not make a single payment, it is very unlikely that the bank would get their full $97,000 back when all is finished.
If banks always want 20% down, why do I see “zero down” loans offered?
This is where Private Mortgage Insurance comes in. If you want to buy a house, but you don’t have the necessary 20% down, the lender may require you to buy a private mortgage insurance policy. This private mortgage insurance is not for you and does not protect you in any way. It does not make payments for you if you lose your job; it does not protect your credit if you default.
Private Mortgage insurance (PMI) is for the bank. You are paying to insure the bank against loss if you default (foreclose). Because of this, many people think the idea of private mortgage insurance stinks, but if you don’t have a 20% down payment, private mortgage insurance is a God-sent. Private mortgage insurance allows many first time homebuyers and newlyweds to achieve the “American Dream”, who otherwise would not be able to.
Private mortgage insurance (PMI) insures the bank in case you default on your loan before you pay your home down 20%. Using the example we used above, let us say that you borrow $97,000 on a $100,000 home. Let us say that you pay your home down $7,000 over the course of a few years- so you now owe $90,000 on your home. If you were to foreclose at this point, the lender would get a check from the Private Mortgage Insurance company for $10,000. Get it? The lender gets their 20% down payment no matter what. Again though, this does nothing to protect the borrower against foreclosure or anything else for that matter.
Confused? Sorry about that. Here is a more technical definition:
Private mortgage insurance (PMI) and government mortgage insurance (MIP) protect the lender against default and enable the lender to make a loan which the lender would normally consider “high risk”. Lenders usually consider any mortgage that has less than 20% down as being “high risk” mortgage loans. Thus, banks usually require mortgage insurance for loans where the down payment is less than 20% of the sales price of the home.
Many lenders also advertise loans with “No Mortgage Insurance,” however, this is actually never truly the case. Lenders know that borrowers don’t like the idea of paying for insurance that doesn’t actually insure the borrower, so they have started to market loans with no mortgage insurance.
This is just good marketing however. Please read on.
How could Arizona Wholesale Mortgage offer loans without Private Mortgage Insurance?
Why would or how could a lender insist on Private Mortgage Insurance for one loan, but also offer loans without Private Mortgage Insurance to the same borrower? The simple answer is that the bank will charge you a higher interest rate for loans that are not insured with Private Mortgage Insurance. Although we offer loans both with and without Private Mortgage Insurance, we try and discourage our clients from taking loans with no Private Mortgage Insurance needed. This is because with Private Mortgage Insurance, when your home’s value increases (either by paying it down or from appreciation), you can get rid of the Private Mortgage Insurance.
In fact, over the past few years, with homes increasing in value so quickly, many of our clients were able to drop their private mortgage insurance after only a year or so. (In other words, they might have put 5% down, but their home went up in value 15% in one year.)
So the borrowers who decided to pay for Private Mortgage Insurance got rid of it after a year, but the borrowers who opted to pay a higher interest rate are stuck with it for life…or they can incur all of the costs of a refinance, if they are lucky enough that their home went up in value and interest rates dropped. This is hardly worth it.
Nonetheless, because customer satisfaction is our primary goal, if you would like a “no Private Mortgage Insurance” loan, we will be happy to help you in this regard. We just want our borrowers to be fully informed.
Okay, why do I need homeowner’s insurance?
A homeowners insurance policy is a package policy that combines more than one type of insurance coverage in a single policy. There are four types of coverages that are contained in the homeowners policy: dwelling and personal property, personal liability, medical payments, and additional living expenses. Homeowner’s insurance, as the name suggests, protects you from damage or loss to your home or the property in it.
Remember that flood insurance and earthquake damage are not covered by a standard homeowners policy. If you buy a house in a flood-prone area, you’ll have to pay for a flood insurance policy that costs an average of $1000 a year. The Federal Emergency Management Agency provides useful information on flood insurance on its Web site at www.fema.gov.
What is title insurance?
Title insurance is always required by the lender to protect the lender against loss resulting from claims by others against your new home. In some states, attorneys offer title insurance as part of their services in examining title and providing a title opinion. The attorney’s fee may include the title insurance premium. In other states, a title insurance company or title agent directly provides the title insurance.
A lenders title insurance policy does not protect you. Neither does the prior owners policy. If you want to protect yourself from claims by others against your new home, you will need an owner’s title policy. When a claim does occur, it can be financially devastating to an owner who is uninsured. If you buy an owner’s policy, it is usually much less expensive if you buy it at the same time and with the same insurer as the lender’s policy.
To help save our clients money on title insurance fees, Arizona Wholesale Mortgage, Inc. actually shops different title companies to find the best rates for our clients.
For more information on our loan products go to our home page at www.azwm.com.