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Basics of Private Mortgage Insurance (PMI)

October 25th, 2012 No comments

Private mortgage insurance can be an advantage to every borrower. However, borrowers need to be careful when entering into agreements which include private mortgage insurance. Generally, private mortgage insurance is designed to benefit the lender and may go too far if borrowers don’t proceed with care.

What is Private Mortgage Insurance?

In case your down payment on a home is less than 20 percent of the estimated value or sale price, you must obtain private mortgage insurance, known as PMI, with your lender. This will allow you to get a mortgage with a lower down payment as your lender is now protected against any default on the loan.PMI provides important protection for mortgage lenders

PMI charges differ depending on the size of the down payment and the loan, but they normally come to about one half of 1% of the loan, as per the Mortgage Bankers Association of America. Mortgage insurance premiums are not tax deductible.

Example, suppose that you put down 10% or $10,000 on a $100,000 house. The lender multiplies the 90 percent loan, or $90,000, by .005. The outcome is an annual PMI of $450, which is divided into monthly payments of $37.50.

The majority of home buyers need PMI because 20% of the sale price on a home is a lot of money; for instance, that’s $20,000 on a $100,000 home. Home buyers should maintain the PMI premiums until they get across that 1/5th of principal threshold, a process that can take years in longer term mortgages.

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 below.

How Will the Borrower be Benefited from Private Mortgage?

Private mortgage insurance allows low income borrowers or those who do not have large amount of readily available income—the chance to buy a home when they can only afford to put down a very small percentage on their purchase. This not only permits them to live in a home but to build equity and enjoy the benefits that come with home ownership. These benefits are big and can be a great way to buy a home.

With this type of insurance, it is possible for you to buy a home with as little as a 3% to 5% down payment. This means that you can buy a home sooner without waiting years to build up a large down payment.

However, there are some things that potential borrowers must watch out for, so that their benefits don’t turn out to be their burdens.

Drawback of Private Mortgage Insurance: What You Can Do to Avoid It

The disadvantage with private mortgage insurance is that you can get stuck paying it for much longer than you might have expected.

Private Mortgage Insurance can be a costly part of your monthly payment.Keep track of your payments on the principal of the mortgage. When you reach the point where the loan-to-value ratio hits 80 percent, inform the lender it was that is the time to put an end to the PMI premiums. The Homeowners Protection Act of 1998, which took effect in 1999, needs lenders to tell the buyer at closing how many years and months, will take for them to reach that 80% level and stop PMI. The law also mandated that once the owner had paid the mortgage down to the 78% level, then the lenders must automatically cancel PMI.

It seems like the Homeowners Protection Act has looked after a lot of headaches. It has worked to defend homeowners, though the law is applicable those who make a purchase of their home on or after July 29, 1999.

So what are the choices for homeowners who bought their homes before that date? And what about those homeowners who are working to pay down to the 78% level, but discover that it is taking a long time to do so? As per some specialists rising prices may be the answer to some homeowners’ woes.

Rising Home Prices: An Answer to Your PMI Woes?

This may not be the best key for you and your family but many homeowners find that taking benefit from the rising costs of homes is the way that they can rid of their private mortgage insurance.

How do they do this?

First they turn up with a small down payment and secure a loan with PMI. 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 chuck out their private mortgage insurance. This doesn’t mean that the rising prices for homes are a good thing. Many homes will often be high-priced even with mortgages offered with private mortgage insurance. However, the ‘rising home price’ choice does exist and borrowers should always know about their options.

Ways to avoid PMI

Avoid private mortgage insuranceIn today’s market there are some new ways to keep away from mortgage insurance even when you don’t have the standard 20% down payment.

Pay more interest: Some lenders will give up the mortgage insurance requirement if the buyer admits a higher interest rate on the mortgage loan. The rate increases usually from .75% to 1%, depending on the down payment. The benefit is that mortgage interest is tax deductible.

Using an “80-10-10” loan: This plan involves two loans and a 10% and a 10% down payment. The 90 percent loan is financed with a first mortgage equal to 80% of the sale price, and a second mortgage for the remaining 10%of the sale price. The second mortgage has a higher interest rate but as it applies only to 10% of the total loan, the monthly payments on the two mortgages are still lesser than paying one mortgage with mortgage insurance. In addition, there is the benefit of mortgage interest being tax deductible.

What happens if You Make Additional Principal Payments on a Mortgage

October 19th, 2012 No comments

debt repaymentMost mortgages have a term of 15 or 30 years, but many are repaid early as the borrower wants to pay off or refinance their debt early. They want to lessen their mortgage debt by making additional payments on their loans. Paying off your mortgage before time has advantages. You don’t have to be anxious about how you would manage to pay for your mortgage payments in case you are laid off. You can also take the money you would have spent on the payments and invest it.

Many borrowers feel like reducing their mortgage debt by making additional payments on their loans and to do this make sure the extra payments are applied toward the principal of the loan and not future payments. You can find this distinction on the payment coupon for the mortgage. While applying extra payments to principal decreases the total interest paid on the loan, the monthly payment on the debt will not reduce as it does with credit card or revolving debt. The monthly payment will remain the same, in spite of extra payments made. To know more about this check out Mortgage Life Insurance guide.

What Would Extra Principal Payments Do to My Mortgage?Mortgage Application Form

Certainly, making an extra payment every year or six months can shave time and money off the mortgage especially while buying a house. But some financial specialists consider that there are better things to do with the money.

Reduce Interest Paid

When you add extra mortgage payments, it not only reduces the principal and cuts down the life of the loan, but also shrinks the amount of interest you will pay over the life of the loan. Even though your monthly payments won’t be smaller, one extra payment a year can save you thousands of dollars in interest applied to the loan that would have been your duty to pay.

For instance, if you made just one extra $1,000 payment at the beginning of a 30 year mortgage at 6.25%, you would save more than $5,000 in interest payments over the life of the loan. If, instead of the one-time $1,000 extra payment, you added $20 of the principal payments each month you would reduce your interest by more than $12,000.

Effects on Mortgage Payments

When you make extra payments on your mortgage, your monthly payment will not alter. The monthly payment is set when you take out the mortgage and does not vary unless you refinance your loan. However, the composition of the payments changes as more of your monthly payments will go toward paying down the principal instead of paying interest.

Reduce the Mortgage Term

Prepaying what you owe on your home decreases the life of the mortgage. For instance, if you had a $20,000 mortgage for 30 years at a 7% interest rate and you decided to pay an additional $200 each month, you would cut almost 10 years off the life of the mortgage.

Check the paperwork when considering refinancing your mortgagePrepayment Penalties

Decreasing your interest payments is good for you but not profitable for your lender. Some mortgages carry a prepayment penalty clause, which charges a fee if you pay off your mortgage before a specified period of time or if you make a lot of extra payments. These are generally between one and five years and can apply to a certain percentage of the loan or the entire loan. The penalties can amount to about 6 months of interest payments.

Other Options

If you are bearing in mind prepaying your mortgage, think about the potential return on other investment opportunities, In case your mortgage has a low interest rate, consider investing some of your extra payments in a mutual fund or stocks that pay a higher rate of return.

For instance, if your mortgage charges 6% interest and a mutual fund will return 9%, you could put on 3% by investing in the mutual fund. You also will gain if you detail your tax deductions as your tax mortgage is tax deductible.

Make an extra mortgage paymentWhen to Pay Extra on Mortgage?

Some people find it easier to make lesser payments each month, while others like to make large lump sum payments on their mortgage. Not considering the method chosen, the major impact on the life of the loan and the overall interest paid is in the first 3 years of the loan. During this time, most of the monthly payment is going toward the interest and not the principal.

Even if you cannot afford to carry in paying extra month and if you did it during the first three years, you would see a remarkable reduction in overall interest paid.

Warning!

Many borrowers select a 15-year mortgage to lessen overall interest expense but extend their budgets to do so. Mortgage lenders recommend choosing the 30-year term option but paying on it as if it was a 15-year mortgage. So in the event of large payments, you can make the lower payment one month and start again the higher payments next month.

Some lenders will provide you a prepayment program of their own, but these generally aren’t worth worrying with. Borrowers who use the programs end up paying a signing fee and perhaps a monthly fee for something they could have done on their own at no additional charge.

Does Mortgage Life Insurance make Sense?

October 9th, 2012 No comments

Mortgage Life Insurance is vital for all owners of homes, condominiums, and townhouses. This is a specialized version of term life insurance and designed to ensure that the mortgage is paid in case you die. This avoids the prospect of foreclosure, which is what your family may have to face with the loss of a breadwinner.

Mortgage life insurance guarantees that your family can hold onto your home, which you may have by now invested a huge amount on.

How Mortgage Life Insurance Works

Mortgage life insurance protectionMortgage life insurance is a little different than traditional life insurance for the only reason that in the event of your death, your family would not be paid any money directly. Instead, if you were to pass away, the mortgage life insurance company would send a direct payment to your bank that satisfies any extra money owed on our property. This leads to a number of questions that must be answered before understanding the policy completely.

Mortgage life insurance is an elective insurance you can get. You as the mortgagee will be covered and in the event that you expire, the insurance will offer your beneficiaries with a tax-free lump-sum that will be employed to pay off the mortgage.

Mortgage life insurance is offered in different types of life insurance plans. Among the more common policies are:

  • Mortgage protection insurance,
  • Decreasing term life insurance, and
  • Level term life insurance

It may be a better idea to evaluate prices, coverage, and plans when deciding which plan may give all the benefits you want for your family.

  1. Mortgage protection insurance can guard you of your lose your job. It also protects you if you have an accident or become ill that keeps you from working. Your mortgage protection insurance makes sure that payments of your mortgage will still be met. This means that you can concentrate on getting well or getting a new job rather than upsetting about how your mortgage is going to be paid. Even better, this type of insurance is simple and fairly reasonably priced to set up.
  2. With decreasing term mortgage life insurance, the coverage is planned to decrease in the same way that the mortgage amount decreases. As you pay off the mortgage, the sum you owe also decreases and this kind of insurance will cover your debt. This makes the coverage more affordable and it is best as you plan on paying off the mortgage.
  3. Meanwhile, a level term mortgage insurance policy maintains the level of insurance for the entire life of the policy. This is best for interest for interest-only mortgages, where you only pay for the interest all through the mortgage and pay the whole loan at the end of the mortgage period.

Mortgage life insurance is generally in the form of decreasing term insurance, with the amount of life insurance lessening as the outstanding mortgage loan decreases over the years.

Benefits of Mortgage Life Insurance

Advantages of Mortgage Life InsuranceIf you are shopping for a new home, or already possess a home, mortgage life insurance can give you and your family the protection they need to maintain their home, in the event you pass away.

Mortgage protection insurance is not Private mortgage insurance, or PMI. Mortgage protection insurance is used to protect your family and your home. Private mortgage insurance is bought to protect your lender.

With a mortgage life insurance policy, the demise benefit proceeds are used to pay off the remaining balance of your mortgage. In case your mortgage is for 30 years, then a 30 year term life insurance policy may be procured to guard your mortgage.

Even though mortgage protection insurance can be purchased with the idea of paying off your mortgage, many financial advisors may recommend that you think about your entire financial situation, and buy a life insurance policy that takes into account all of your monetary needs for your family.

Additional Benefits

You can also glance into adding more levels of protection for your mortgage life insurance. You can consider:

Permanent DisabilityPermanent Disability:

Pays for the monthly approval for a number of months in the event that you get disabled. The payment is restricted to the maximum number of months or if you pick up from the disability. To know more about disability check out our Mortgage Disability Insurance.

Critical Illness Cover:

Pays a lump sum in the event that you are seriously ill. This cover generally has a list of critical illness and the payment will be upon analysis of an illness that is in the list.

Joint or Single Life Policy:

You have the choice of either offering cover for yourself alone or including your other half in the cover. The policy will disburse if either you or your spouse passes away and then the policy will be ended. In short, the policy only pays one time.

The Best Mortgage Life Insurance Policy

Mortgage Life InsuranceThe best policy of this type is one that comes from a legal company and can be found by browsing through your favorite search engine. Usually you are eligible to apply for this policy at any time but it may be offered to you in some way or form at your closing.

One of the most useful tips to remember is that if at any point you refinance, take another mortgage out or switch your mortgage to another lender. You must reapply for an entirely new mortgage insurance policy as they are only able to insure existing mortgage policies. This type of mortgage insurance applies only to individual mortgages and must be reapplied if you change your mortgage at any given time.

Obtaining mortgage life insurance quotes is the entry for getting started on this coverage and is quite an easy process.

Remember, if you were no longer there to provide for your family, they would not only need funds to pay for the mortgage, but also for other living expenses such as clothing, education, and all of the other items currently accounted in your family budget.

The bottom line is mortgage life insurance not only gives protection for your family, but it also assists them to continue their existing lifestyle in the home they share with you.