February 10th, 2015 5:34 AM by Jackie A. Graves
One of the services that enables borrowers to
buy homes without making large down-payments is mortgage
While all loans by
nature are risky, borrowers who put 20 percent down, or who refinance with 20%
equity in their homes, are considered to be good risks. They have "skin in
the game" that they don't want to lose and that helps protect the lender,
Many first-time and low-income borrowers are good risks, but it would take them
too many years to save enough money to buy a home with 20 percent down or more.
Many high-income borrowers may have enough cash to put that much down, but they
prefer to leverage their credit and use their cash for other purposes.
If you're one of
these borrowers, the advantages to MI are many. You can get into a home sooner
with a much lower down payment, as little as five percent down in some cases.
Your MI is 100% tax deductible and you can tailor your MI payments to suit your
income. You can pay monthly, annually, or finance the entire amount into your
Depending on the laws
in your state, how well you've handled your payments, and other criteria, you
can get your private MI canceled once you've reached 20 percent in equity. It's
canceled automatically if the loan to value is paid down to 78 percent based on
the original value of the property.
In markets with
significant housing appreciation, it's possible to get MI removed from your
loan sooner than five years. You can do this by paying more toward your
principal each month, or if you can prove that your home has acquired at least
20 percent equity via the marketplace.
There are several
ways to get mortgage insurance. MI is available with government-insured loans
like FHA for qualifying borrowers and through private mortgage insurance
companies such as PMI Group.
A typical mortgage
insurance program is a five-year term, which means the insurance is paid in
full in five years. This is based on the loan amortization schedule for loans
in which most of the monthly payment goes to pay the interest on the loan and
to reduce the principal. Once the principal has been reduced to the amount insured
by MI, the MI is paid in full and is automatically removed from the loan.
Your lender will tell
you what is required to remove MI, such as getting a bank appraisal and showing
recent sold comps provided by your real estate professional. But with some types
of loans such as FHA loans, which are popular for requiring relatively little
money down, borrowers pay MI for the life of the loan with no possibility to
cancel the MI.
The alternative to
getting a loan with MI is simply pay the bank a higher interest rate, and they
pay the MI, but keep in mind that interest rates never go down unless you are
able to refinance the loan to a lower rate.
Should you be
concerned if you can't afford to buy a home without MI? No. Just think of it as
part of the interest rate. Because you have less skin in the game, the lender
wants to make sure the loan will be paid in case of default. MI provides that
Written by Blanche Evans | To view the
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