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What
is Private Mortgage Insurance? (PMI)
Private
Mortgage Insurance (PMI) is default insurance on mortgage
loans, provided by private insurance companies. PMI allows
borrowers to obtain a mortgage without having to provide 20%
down payment, by covering the lender for the added risk of
a high loan-to-value (LTV) mortgage. The Homeowners Protection
Act of 1998 requires PMI to be canceled when the amount owed
reaches a certain level, particularly when the loan balance
is 78 percent of the home's purchase price. Often, PMI can
be cancelled earlier by submitting a new appraisal showing
that the loan balance is less than 80% of the home's value
due to appreciation (this generally requires two years of
on-time payments first) Different terms:Mortgagee's Title
Insurance is a policy that protects the lender from future
claims to ownership of the mortgaged property. Generally required
by the lender as a condition of making a mortgage. In the
event of a successful ownership claim from someone other than
the mortgagor, the insurance company compensates the lender
for any consequent losses. Mortgagor's Title Insurance is
a policy protecting the buyer/ owner of real property from
successful claims of ownership interest to the property. The
coverage usually is supplemental to a Mortgagee's Title Insurance
policy, and the premium is customarily paid by the buyer.
Features
of Private Mortgage Insurance:
- The
PMI charges depend on the amount of down payment and loan
to value ratio.
- The
mortgage insurance premiums are tax-deductible.
- A part
of the private mortgage insurance premium is paid at closing
and the rest is included in the monthly mortgage payment.
- A borrower
has to pay these insurance premiums until the home equity
increases to 80% of the property value. But in case of mortgages
insured by the Federal Housing Administration, the private
mortgage insurance is to be paid throughout the loan term.
Benefits
of Private Mortgage Insurance:
- Private
mortgage insurance helps a borrower to take a mortgage with
a down payment as low as 3% or 5%.
- It
helps lenders from losses in case the borrower fails to
make monthly payments on the mortgage.
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