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The Scoop on Private Mortgage Insurance

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Many home buyers have never heard of private mortgage insurance (PMI). PMI only becomes a factor with low down payment or no money down home purchase or refinance mortgage loans where the lender writes a loan over the 80 percent loan to value ratio. With excellent credit, prospective home buyers can now purchase a home with low down payments as little as 5 percent, even zero percent down. Some mortgage lenders will even loan up to 130 percent of the home purchase price, including closing costs. However, PMI is required for these mortgages exceeding 80 percent of the home value. These are dangerous loans for mortgage lenders; if the mortgage is lost in foreclosure, the PMI insurance pays any loss on the mortgage over 80 percent of the original mortgage value. PMI is expensive but can sweeten the deal for home buyers. It enables homebuyers to purchase homes with little or no cash down payment.

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Private Mortgage Insurance is not tax deductible. The insurance industry has been lobbying Congress to make insurance premiums tax deductible just like the interest payments on a mortgage is deductible. Insurance companies argue that private mortgage insurance enables Americans to purchase homes when they might otherwise not be able to. This helps the economy, boosts employment, and could result in a national home ownership rate over 70 percent. The argument against these insurance premiums being tax deductible is that the IRS would suffer a tax loss.

Private mortgage insurance has a bad reputation in the industry. The reason for this is some mortgage lenders will not cancel PMI premiums even when it is no longer needed. The insurance is not needed after the ratio if loan to value ratio falls under 80 percent. Many mortgage lenders have adopted government guidelines that PMI insurance premiums should be cancelled if the mortgage loan is at least two years 24 months old, has an on time payment record, and the home equity is at least 20 percent. If your mortgage loan includes monthly private mortgage insurance premiums, there are two ways you can potentially get out of it.

First, ask your mortgage lender or cancel your premium. You will have to pay for an appraisal of your home. The appraisal typically costs from $300-$400. This will be very profitable if you have at least 20 percent equity in your home either from appreciation or improvements. Second, if your mortgage lender refuses to follow the Fannie Mae and Freddie Mac guidelines of 24 months on time payments with 20 percent equity as proven by your appraisal, your best bet is to refinance with a lender that doesn?t require private mortgage insurance.

Be sure and ask for a refund when your premiums are cancelled. Premiums are collected monthly, but paid annually by the mortgage lender to the insurance carrier so you may have a balance refundable to you. If you don’t receive your refund, you may have to file in local Small Claims Court to get your money back.

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