what is PMI and do I need it

Private Mortgage Insurance - PMI Why do I need that?

The information below was taken from one of the hundreds of mortgage company sites that are on the Web. I had to remove several come-ons for 100% financing and other methods of avoiding PMI. If you want to see some of these “deals” just type PMI into your search engine. Please be very cautious about what you see in the responses.

PMI is an onerous insurance that the lenders themselves levy upon you to insure themselves against loss. Then they have the chutzpa to also provide you with the solution to this problem – just pay them more by borrowing more. Our advice is that you consider very carefully if you can really afford the house that you’re trying top buy, if you can’t afford the 20% down payment that will avoid PMI. If you still like going ahead, please be careful not to get in so far over your heads that you become “house poor” (unable to afford anything else because all of your money is going into the house payment), or, worse yet, get into a situation where you have to default and ruin your credit rating for a very long time. Work with a financial advisor to determine what you can really afford and try to maintain the discipline necessary to stay within your means.

What is Private Mortgage Insurance (PMI)?

PMI is Private Mortgage Insurance that insures the lender against loss if the borrowers default on the mortgage loan. PMI is usually required when the borrower’s down payment or equity is less than 20% of the loan value. Of course, not all lenders require PMI, although those that follow the Fannie Mae and Freddie Mac guidelines for loan approval do require PMI.

The mortgage insurance is usually escrowed into your mortgage payment, and when a borrower reaches 20% equity, they no longer need mortgage insurance. PMI is the equivalent of FHA or VA insurance on government mortgage loans.

How Can I avoid PMI?

The easiest way to avoid PMI is to invest a 20 percent down payment at the time of the loan. Lenders will not require PMI when the loan to value (LTV) is 80% or less. However, coming up with 20 percent down payment is very difficult for many borrowers. Another way to avoid PMI is to apply for subsidiary financing (home equity loan or line of credit) and close it at the same time as your first mortgage. These types of programs are referred to as 80/20, 80/10/10, 80/15/5, etc.

Another way to avoid PMI is to use a sub-prime or B-Credit lender. These loans will often have higher interest rates, but at least interest is tax deductible (where PMI is not).

When can I remove PMI and How do I do it?

PMI payments can be dropped from your mortgage when your LTV falls below 80%. Most lenders will not automatically drop your PMI though. It is the borrower's responsibility to contact the lender and pay for a real estate appraisal. If the appraisal shows that your loan has fallen below 80% LTV, then your PMI will be dropped.

Note: If your LTV has fallen below 80%, it may be beneficial to consider refinancing your home or getting a home equity loan/line for the equity. Lines of credit can be good emergency funds in case of sudden loss of income and should be applied for when the borrower is in a good financial situation and employment status. Many borrowers do not apply for lines of credit during this time and wish they would have when tough financial times come up. Banks/lenders will not lend you money if you do not have a job, but will not close one that's already been opened.

How Much Is PMI?

Premium prices vary. They are based on the size of the down payment, type of mortgage and amount of insurance coverage. Premiums typically are folded into your monthly mortgage payment. The range for a median priced home is $50 to $80 per month (in 2001, the national median price for a single family home was $147,500). You can pay the premium up front and finance it as part of your mortgage. Lender-paid policies also are available, but they result in a higher interest rate on the mortgage.

Is PMI tax Deductible?

The President signed a new law into effect in December, 2006 that makes PMI tax deductible starting in 2007 - sort of. Check with your tax preparer about the deductibility of your PMI. Here are the caveats -

·	The legislation is only good for loan closings in 2007. Congress is supposed to evaluate the law at the end of the year for a possible extension.

·	The PMI premium is 100 percent deductible only if household adjusted gross income is $100,000 or less. The deductibility decreases by ten percent for every $1,000 in annual income that exceeds 100K. This means that household incomes greater than $109,000 receive zero PMI deductibility.

Read this article for the full story on the new PMI tax law.

If you are an investor, you may be impacted by changes that the PMI companies made in 2008 dealing with investment properties