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Mortgage Insurance

Weekly Commentary - Rob Chrisman

 

Last week we discussed how, under the new Trump administration, HUD suspended the 0.25 percentage point premium rate cut for Federal Housing Administration-backed loans until further notice. The Housing and Urban Development’s letter implied that they felt the insurance fund was not yet stable and couldn’t afford it, and suspended the cut “indefinitely … effective immediately.”

 

But the FHA does not offer the only mortgage insurance in the United States. The clients of Opes Advisors should know that private mortgage insurance – commonly known as PMI – is applicable to conventional loans. PMI is a type of insurance that protects the Lender on a loan in which the borrower’s down payment is less than 20 percent.

 

The premium is included in the monthly mortgage payment. This cost is in addition to taxes and homeowner’s insurance payments. PMI can also be, depending on the program, financed or paid up front in a lump sum. The PMI rate is determined by the borrower’s credit score and the amount of the down payment.

 

With the passage of the Homeowner’s Protection Act (HPA) of 1998, PMI coverage cancels automatically when the borrower reaches 22 percent equity, or 78 percent loan-to-value. A request can be made to have PMI removed when the loan reaches 80 percent loan-to-value. In this case however, the value of the home must be proven with an appraisal.

 

Before the existence of PMI, a large number of folks with 20% down did not have the opportunity to be homeowners. PMI has enabled many buyers to get into a home when they might have otherwise not been able to. Another side note, PMI can be tax deductible depending upon how the homeowner files their tax returns.

 

If you have further questions about mortgage insurance, whether it is in the FHA program on conventional (Fannie Mae or Freddie Mac) program, be sure to ask our Mortgage Advisor!