PMI is insurance taken out on a loan to protect the lender from losing money in the transaction. It is common knowledge in the mortgage industry…that people who cannot afford to put up at least 20% are more likely to default.
PMI is designed to step in and cover the spread between what you get out of the house from foreclosure and what is still owed on the loan.
While PMI does cost a lot, it at least gives those who cannot save up the 20% down payment the opportunity to buy a house and begin building equity.
Prices of some homes may be falling, but one piece of the mortgage transaction is getting more expensive, not to mention impossible for some buyers to obtain: mortgage insurance.
That means buying a California home using a small down payment will get tougher. Companies that sell mortgage insurance – a part of the process that many home buyers don’t think about – have been tightening their guidelines for months, and most have raised rates.
On Aug. 4, one of the companies, MGIC, will increase premiums and no longer offer insurance for California properties if borrowers have down payments of less than 10 percent. Other insurers have already made the change.
With the surge in defaults and foreclosures, "insurance companies behind the scenes have been suffering and taking losses," said Brendon Riordan, an executive with Los Gatos-based mortgage bank and brokerage Princeton Capital. "As a result they are having to change their guidelines and increase their premiums."
Mortgage insurance protects mortgage lenders, not homeowners. In the event that homeowners stop paying their loans, mortgage insurance covers some of the lenders’ financial losses. The policies are also known as "private mortgage insurance" to differentiate from government-insured loans available from the Federal Housing Administration (FHA) or the Veterans Administration.
Lenders usually require anyone buying a home with a down payment of less than 20 percent of the home’s purchase price to pay for mortgage insurance. Until the past several years, nearly one-fifth of mortgages made in the United States had such insurance, said Michael Zimmerman, senior vice president for investor relations at MGIC, one of the country’s seven mortgage insurance companies.
But in recent years, lenders often allowed borrowers to side-step the insurance by getting "piggyback" loans. In a typical scenario, the borrower who could only come up with a 10 percent down payment would get one loan for 80 percent of the price, and another for 10 percent. Even though the down payment was only 10 percent, lenders required no mortgage insurance – one of many ways they exposed themselves to risk in recent years. Piggybacking took away about half of mortgage insurers’ normal business between 2004 and 2006, Zimmerman said.
Here’s a press release:
It hasn’t been the best of times lately for those with a home mortgage. Most of us are feeling the squeeze with rising interest rates, and lenders tightening their lending criteria. Some are taking advantage of lower house prices, but are still feeling lost and confused when it comes to mortgage refinancing or taking out a second mortgage on their family home. Many are turning to private mortgage insurance to help reduce any adverse risks of investment decisions they are taking now, to help cement their future financial position. A new website ( http://homemortgagesrevealed.com ) is helping professional investors and mom and pop investors unravel the jargon and find the best strategies for structuring their home mortgage or second mortgage.
Visitors to http://homemortgagesrevealed.com can download a free mortgage insurance guide that will help consumers save money when dealing with private mortgage insurance. There is also an exclusive ebook available at http://homemortgagesrevealed.com/ebook.html titled "Everything you always wanted to know about home mortgages". Calvin Golden from http://homemortgagesrevealed.com said "If you are thinking about buying a home in the near or even in the distant future, you will need two very important things: knowledge and funds. A home is a huge investment so you’ll need money. It’s also a complex undertaking so you’ll need knowledge so you make the right decisions. Buying a home is probably the biggest investment you will make in your lifetime and many people make mistakes when shopping for a mortgage that costs them thousands of dollars in unnecessary payments. Having knowledge is vital otherwise you could make a mistake that costs you money for years to come"
http://homemortgagesrevealed.com offers a wealth of free information on topics diverse as Deed Of Trusts, Mortgage Brokers, Mortgage Refinancing and many many more. Armed with this knowledge, the savvy investor can structure their finances to maximise their investment returns and minimise the amount of interest and fees paid on both their existing home mortgage, and any second mortgage they take out for investment purposes.
Calvin Golden adds "Knowing more than just the basics about loans and mortgages can not only save you money off the cost of buying your home but can also increase your chances of being approved for your dream home plus help you if you need unique needs met. Stop Paying Rent NOW. Many people continue to pay rent because they don’t think they can qualify for a mortgage. There are secrets revealed in "The Beginner’s Mortgage Guide" to help you in the case of not being someone who would typically qualify for a mortgage. Those who get turned down once need not give up their dream of being a homeowner. If you’ve started down the road of mortgages and are overwhelmed or have faced rejection, "The Beginners Mortgage Guide" is a MUST"
I implore you to arm yourself with the facts and knowledge when structuring your home mortgage or applying for a second mortgage for investment purposes or to cope with the current current credit crunch. Mortgage refinancing is one strategy that can be effective, but you will need to ensure you have adequate private mortgage insurance so you don’t get burned. Please visit http://homemortgagesrevealed.com to educate yourself today.