Real Estate NewsWhy PMI?
Banking theory holds that it"s dangerous to lend anyone
more than 80 percent of the value of a house. If the
homeowner fell down on payments, and the house were seized and
sold at a foreclosure auction, it might not bring enough to
cover the loan, legal expenses of the sale, unpaid property
taxes and lost mortgage payments. Then there could be the
cost of holding the property till the sale -- possibly
insurance premiums, heating bills, even lawn cutting.
So bank regulators ruled it was irresponsible to risk
depositors" money (which is where mortgage loans came from in
the simple good old days) by lending more than 80 percent of
the property"s value.
Where did the rest of the purchase price come from? Easy.
In the old days, people didn"t buy houses until they had
considerable savings.
Then came the Great Depression, and with lots of housing
standing empty, the government stepped in with a new idea:
homebuyers could pay for insurance that would protect the
lender against loss in case of default. (It wouldn"t protect
or reimburse the borrower, of course, just the lending
institution.)
Once the buyer agreed to pay premiums for that FHA
insurance, banks were safe in lending almost the full value of
the property. Low down payment! But on only the modest
houses the plan was intended to rescue.
Then came World War II, and the GI bill (the same one that
sent millions of returning servicemen and women back to
school) set up an even better deal. At no cost to the
veteran, the government would guarantee the top 25 percent of
a mortgage loan. With a guarantee like that, banks needed no
down payment at all on a VA mortgage loan. Nothing down!
FHA and VA mortgages had some limitations, however, and
gradually the concept of private mortgage insurance (PMI)
evolved. Now lenders could offer a variety of conventional
morgages, with less than 20 percent down, if the borrower
agreed to pay PMI premiums.
The question that arises, of course, is -- must the
borrower continue to pay for that protection once the debt has
been paid down to less than 80 percent of value?
Some private mortgage policies contain varying answers.
Some states have addressed the issue. In New York, for
example, PMI can be cancelled (at least it"s supposed to be)
when the loan drops to less than 75 percent of the property"s
value.
The question always arises, though. Does that mean 75
percent of the original purchase price, or 75 percent of
current value? If the latter, must the homeowner then pay
several hundred dollars for a new estimate of value by the
lender"s appraiser?
And does the homeowner have to request that PMI be
dropped, or will the lender do it on its own initiative?
The answers are all over the place.
Recently, the federal government stepped in with new
regulations. For mortgages placed after July 29, 1999, PMI
coverage can be dropped at the borrower"s request when equity
reaches 20 percent (that is, the loan drops to no more than 80
percent of value), and in any event it must be dropped when
equity reaches 22 percent.
Light at the end of the tunnel!
Related Articles:
Less PMI = Lower Home Costs
PMI Gets Wise to Consumers
What Every First Time Buyer Should Know About PMI