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The Homeowners Protection Act May Save You Money
If you purchased your home with a
down payment of less than 20%, odds
are you also purchased - and continue
to pay for - private mortgage insurance
(PMI).
PMI protects lenders against default
on loans with low down payments by
providing coverage for the costs of
foreclosure that cannot be matched
by the borrower's investment in the
house.
This protection is particularly
important to lenders when a mortgage
is taken for a low-down-payment
purchase because of the statistical
correlation between low borrower
equity and default. There is also
a common sense correlation: the
more of your own money you have
invested in a home, the less likely
you are to allow it to go into foreclosure.
Here's how it works. Your
mortgage lender chooses an insurer
who sells the lender a policy covering
20% to 30% of the mortgage balance - more
than enough to cover the lender's
costs should they be forced to foreclose
on your home. The lender then includes
the cost of the premiums in your
monthly mortgage bill.
PMI Helps You Get the Most
for Your Money
Without the availability of private
mortgage insurance many people would
have to wait much longer before
achieving the goal of homeownership,
industry experts say. In the last
25 years, home prices have appreciated
at a much faster rate than salaries
have grown. This means that it is
much harder for today's first-time
homebuyers to save enough to make
a down payment than it was for their
parents or grandparents.
But PMI makes it possible for lenders
to offer mortgages to buyers making
down payments of as little as 5%
to 10% of the home's total
value. This can take years off prospective
homeowners' wait for savings
to accrue.
PMI also allows buyers - whether
first-time or not - to significantly
increase their purchasing power.
Because it permits the down payment
to be a much smaller percentage
of the total purchase price, PMI
can "convert" a prospective
buyer's $10,000 from a 20%
down payment on a $50,000 home to
a 10% down payment on a $100,000
home - or even a 5% down on
a $200,000 home.
Insurance Becomes Unnecessary
Over Time
What many of the homeowners taking
advantage of these policies don't
know is that they do not have to
go on paying PMI premiums indefinitely.
A recent law, The Homeowners' Protection
Act of 1998, which went into effect
on July 29, 1999 requires lenders
to automatically cancel PMI once a
homeowner's equity in a property has
hit 22%. Homeowners, whose mortgages
originated prior to the enactment
of this law, will still be protected
by the act's mandatory requirement
that lenders notify all homeowners
of their right to cancel PMI and how
to go about doing this. Under this
law homeowners have the right to initiate
cancellation themselves once they
have attained 20% equity in their
home.
If you are paying unnecessarily, canceling
your PMI could save you hundreds of
dollars each year. In addition, many
PMI payment plans begin with the full
first-year's premium payment placed
in an escrow account by the lender,
followed by 1/12 of the annual premium
paid with each monthly mortgage payment.
If your PMI payments were structured
this way, you may also be entitled
to a refund for any unused premium
payments in the escrow account. |
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