Private Mortgage Insurance: What You May Not Know and How That Can Hurt Your Family

Home Loans

Private Mortgage Insurance: What You May Not Know and How That Can Hurt Your Family
(presented by www.refinance-refinance.net - mortgage lenders)

By Eric�Osman

WHAT IS IT?
Private Mortgage Insurance (PMI) is privately purchased insurance program that protects a LENDER in the event that a homeowner defaults on a loan. Most lenders require a 20 percent down payment. Private Mortgage Insurance allows those who are unable to pay 20 percent to take out a mortgage by insuring the lender against the risks of foreclosure. The lender pays private mortgage insurance, but buyers who cannot pay 20 percent equity have to pay a higher interest rate to cover the insurance, or the buyer may pay the PMI premium as an addition to their mortgage payment. The FHA also offers a similar insurance that provides the same lack of protection for the homeowner.

A significant portion of all home owners are required to purchase PMI as a condition of being accepted for a loan, however, most do not understand what type pf of protection it offers, and most importantly, WHOM it protects. As a result, many new homeowners pass up the opportunity to purchase life insurance (mortgage protection) in the mistaken belief that they are already covered. This can result in tragic circumstances when an income provider dies or becomes disabled and the homeowner discovers, too late, that the PMI they were required to pay for ONLY protects the lender, DOES NOT pay off their mortgage or make the payments and; consequently, they can lose their home to foreclosure, be evicted, and lose all of the equity they had accumulated.

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Not only does PMI not protect the homeowner, it is not even deductible as the result of a long standing IRS regulation. Congress is currently reviewing that status, however, differences in how such a deduction would work and election year politics makes it unlikely that any relief will be granted in the near future.

IS A HOMEOWNER REQUIRED TO CARRY PMI?
PMI is maintained at the option of the current owner of the mortgage (lender). In many cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. However, the degree of equity in the home is not the only factor that a lender may take into consideration. Note that the law in certain states requires that mortgage insurance be canceled under some circumstances.

CAN A HOMEOWNER RECEIVE A REFUND?
If all the mortgage insurance was financed at the time of origination and is canceled prior to its maturity, the homeowner may be entitled to a refund if the refundable option was chosen at time of origination. However, if the no refund/limited option was chosen, no refund is due.

SHOULD A HOMEOWNER PAYING FOR PMI CONSIDER BUYING LIFE INSURANCE?
If a homeowner wants to properly protect their mortgage they must do so by purchasing life or disability insurance policies that allow them to designate the beneficiary(s) of their choice. Life insurance is normally not a popular subject to discuss, nor purchase to make. You can

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This entry was posted on Saturday, July 29th, 2006 at 6:26 am and is filed under Refinance. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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