Wednesday, February 20, 2008

The ABCs of PMI

With all of the seismic changes happening in the mortgage markets, one aspect to keep in mind is PMI, aka Private Mortgage Insurance. PMI is when you buy insurance to cover your lender (not you) because you are taking out a loan deemed to be riskier than most.

PMI is usually needed on loans for more than 80% of a home's assessed value, which account for many mortgages in the Bay Area. So, if you are putting less than 20% down on your home purchase, you will most likely need PMI.

How much is PMI? Generally, it costs one-half of one percent of the total loan. So, if your loan is for $500,000, your annual PMI will probably be around $2500 annually, or about $210 per month. That is a lot of money to add to your monthly budget, and it is not always tax deductible.

Because of the major shifts in the mortgage industry, PMI guidelines will also be getting tighter. The private mortgage insurance companies are indicating that they will no longer provide the insurance for 100% financing or even for loans with just 5% down. It appears that a minimum of a 10% downpayment will become necessary. And, if you can't get PMI, then you probably can't get your loan.

There are some ways around PMI. Some lenders will waive it if you get your loan at a higher interest rate, and that interest would be tax deductible. Or, you can get a second mortgage (at a higher interest rate) to help get to a 20% downpayment.

One final note: always make sure to cancel the PMI when you pay down the premium to 80% of the home's value. Don't wait for the lender to do it, even though they are legally required to.

PMI and the changing mortgage market can be challenging to understand, but please let me know if you have any questions. I am always happy to help. I can be reached at 510-547-5970 x57 or