PMI and the 1998 Homeowner's Act
Let's first define what private mortgage insurance actually is,
and why you might be required to purchase the insurance. Private
mortgage insurance is an insurance purchased to protect the
lender, not the borrower. The borrower however pays for the
mortgage insurance, and this is provided to the lender instead
of the 20% down payment normally required when purchasing real
estate. The insurance provides the difference between the fair
market value of the home and the actual price a lender may be
able to sell the property for, in case of a default on the loan.
Normally, the lender will require a 20% down payment and forgo
the private mortgage insurance option. However, under certain
circumstances if the buyer has an excellent credit rating, is
well known to the lender, and is deemed to be low risk, private
mortgage insurance may be an option offered by the lender.
The current mortgage market is flooded with such varied products
as the interest only loan and the 125 loans and private mortgage
insurance seems to be a thing of the past. You rarely encounter
a situation when the buyer is required to purchase the private
mortgage insurance; those situations most likely to continue to
require the purchase of the private mortgage insurance are those
where the lender is a traditional lending institution. Mortgage
companies have long since ceased requiring borrowers to purchase
private mortgage insurance.
Mortgage investors, such as the Fannie Mae and Freddie Mac
programs, have recently come to the aid of the borrower by
introducing an option to the primary mortgage market that allows
borrowers to pay as little as 5% down and purchase only enough
mortgage insurance to cover 25% of the loan; this creates a
potential citing situation for the borrower. The borrower may
pay a slightly higher interest rate in order to lower the cost
of insurance that the advantage lays here: mortgage interest is
fully tax deductible, private mortgage insurance is not.
There's another option, also regulated by the federal government
and passed into law in 1999, known as the Homeowners Protection
Act of 1998 established rules for regulation of private mortgage
insurance requirements once a homeowner reaches a level of 20%
equity. What the law requires, in layman's terms, is that a
lending institution must notify you once your equity levels
reach 20% of the appraised value of the home. Once you the kind
of 20% equity level, you must be given the option to drop
private mortgage insurance. If this proposal had passed into law
some 20 years ago, it would have been met with great resistance
among the lending community; today, the interest only loan and
loans that offer mortgages in excess of the appraised value of
the home overshadow the effect of the 1998 homeowner's act.
The regulations passed into law by the 1998 Homeowner's Act do
not affect FHA or VA loans, and many of the Fannie Mae and
Freddie Mac programs have additional stipulations and
requirements in addition to the 1998 law. Also, your state laws
and regulations may also affect your insurance requirements. Due
to the recent increases in real estate pricing, and as a result
the increased level of a mortgage borrowing requests, Fannie Mae
and Freddie Mac have increased their loan limits and private
mortgage insurance limitations. They even the secondary market
has a need for the private mortgage insurance requirements,
thanks to the booming real estate economy.
Many homeowners seem to mistake the private mortgage insurance
purchased in order to secure the loan, with that of the
homeowner's liability insurance. Lenders are responsible for
making clear the distinction between private mortgage insurance
purchased to protect the lender versus the homeowner's liability
insurance purchased to protect the homeowner. Both forms of
insurance will need to be purchased, and the borrower will be
responsible for payment of both insurance premiums.
The Homeowner's Act of 1998, served as a way for the borrower to
decrease their monthly mortgage payment, once the 20% equity
level have been established; this seems like a small
contribution when you examine the mortgage products offered
today, that do not require the borrower to establish any equity.