Are you thinking about buying a home? It is a buyer’s market, because there are a plethora of homes for sale at great prices, and interest rates are still relatively low. Of course, when buying a home, there’s a lot more to think about than just securing a loan and making house payments. You need to be cautious about the area where the home you buy is located, because even if the home is valued quite low when you buy it, when we finally get out of this recession, home prices will go back up, and you need to be sure that you can afford the property taxes you will be assessed. Another expense might be carrying PMI mortgage insurance if it’s required.

With home prices climbing, many people have difficulty getting the 20% down payment; and studies have shown that buyers who put down less than 20% are more likely to default on the loan. Thus the PMI is useful to the lender in securing the loan, and buyers can buy sooner because they don’t have to wait for years while they accumulate an acceptable down payment.

Lender-paid Mortgage Insurance (MI)- Another method of buying a house with less than 20% down is Lender-paid MI. With this MI program the lender pays for the MI premium while the borrower in turn often receives a slightly higher interest rate, usually a quarter-percent. While this slightly higher-interest rate is for the life of the loan, it often results in a lower monthly payment than taking out two loans (piggy back loans, described below), and reduces the costs of closing two loans. The interest paid on this slightly higher rate loan would be tax deductible. Lender-paid MI cannot be cancelled.

Once the loan is paid down to 80% of the property value, most lenders would drop PMI coverage if buyers had a good payment history and requested to drop it. However, most consumers were not aware of this possibility and had to keep track of their loan balances. People often failed to request the change, and they paid unnecessary insurance payments for years. New laws passed in 1998 have made lenders and buyers equally responsible for how long the PMI is carried on a loan so that this situation is no longer a problem. When a loan is paid down to 78% of the value and if the buyer is current on the loan, the lender must automatically terminate the PMI.

Every case is different, though, so you will want to discuss your options with both your real estate agent and your lender to see if you will qualify for a loan without having to pay extra for PMI.

Learn more about Obama Mortgage Relief Plan Qualifications.

Making mortgage loans can be a risky business. As with all businesses, lenders are looking for assurance that their investments will be protected. However, it’s not always easy to predict which borrowers will default on their mortgages or eventually go into foreclosure. Because of this, lenders require that the borrower pay for Private Mortgage Insurance under certain circumstances.

What Does PMI mortgage insuranceI Do? Private Mortgage Insurance protects lenders in the event that the borrower does not repay the loan. Instead of the lender losing the money, the insurance company will step in and cover the losses. Typically, PMI only covers the difference between the home’s value and the remaining balance on the mortgage, as the lender can recoup the remainder through sale of the home.

The Homeowner’s Protection Act includes rules for automatic suspension of PMI payments and cancellation of PMI when 22% equity in the borrower’s home is reached. Those rules apply to mortgages signed on or after July 29, 1999, and exclude government-insured FHA or VA mortgages that are considered high-risk to default. Additionally, disregarding the time when the mortgage was signed, the borrower may ask for PMI termination once s/he exceeds 20% equity.

Why Offer It? It would be much safer for lenders to only accept borrowers that can make a 20% or more down payment, but that would significantly lower the number of individuals that are able to purchase a home. Instead, PMI protects the lenders just as if the borrow had made the full 20% down payment, of course, it is an additional expense to the borrower.

Choosing a Finance Single Premium Option over Private Mortgage Insurance- Since an increasing number of borrowers are turning to piggyback loans in order to avoid PMI, the mortgage insurance industry came up with this solution claiming that it lowers monthly mortgage payments to the same or lower level as a piggyback loan. With this option homebuyers pay a single premium on their insurance and it is amortized over the term of loan. One of the pitfalls of this solution is that few lenders offer this option, since Fannie Mae and Freddie Mac do not work with this kind of PMI structure. Finding a Loan with No Private Mortgage Insurance- Loans with no PMI have one great disadvantage – they typically have higher interest rates. Instead of paying regular PMI, the latter is included in the higher rate of the mortgage. Which of the above solutions will be best for you depends entirely on your particular case. Sometimes paying the private mortgage insurance might turn out more beneficial than choosing to avoid it with a second mortgage. Therefore you should consider your decision carefully and make all the necessary calculations in order to make the right choice.

Learn more about Obama Mortgage Relief Plan Qualifications.

I would like to discus two mortgage terms that every one looking to find a mortgage should know amortization and private mortgage insurance (PMI). Amortization: Amortization is the process by which your monthly loan payment is determined In an Amortized loan you make periodic or monthly payments. In an amortized loan the amount of the loan payment is determined by the size of the principal on the mortgage, the type of mortgage, the interest rate on the mortgage, and the number of payments you are too make. If you have a Fixed Rate Mortgage your payments will be the same over the life of the loan. While if you have an Adjustable Rate Mortgage (ARM) your monthly payments will change with the change in interest rates.

How Lender Paid Mortgage Insurance Works- LPMI is where the lender waives the requirement of PMI in exchange for assessing a higher rate of interest. While paying more interest is not something that you typically want to do, many borrowers that cannot meet the demands of a down payment that is requested at 20% find this a feasible option in order to obtain financing. Another added benefit to going with lender paid mortgage insurance is that you do not risk raising your monthly payments to a level that you cannot afford. In fact, going with lender paid mortgage insurance instead of PMI can actually lower your monthly payment.

PMI vs. LPMI – An Example- Let us have a look at the difference between these two options PMI mortgage insurance or LPMI) on a $200,000 mortgage financed over a term of thirty years at a fixed rate. The necessary down payment on a mortgage of this size under the 20% rule would be $10,000. Under the home loan that is financed requiring PMI, we will assume a thirty year fixed rate of around 5.6%, making the payment amount range around $1250. The same loan written with lender paid mortgage insurance under the same term of thirty years at a rate of 6.4% would have a payment of around $1180 a month. Basically, the lessened interest for the mortgage that requires private mortgage interest costs makes the lender paid mortgage insurance loan less, even though the lender is requiring a higher rate of interest.

Let’s give an example of how PMI works- Let’s say I have $20,000 in the bank for a down payment on a house. If my only option was to put down a down payment I could only afford a house with a maximum value of $100,000. But if I can purchase private mortgage insurance and put down %10 I could afford a house with a maximum value of $200,000. With a %5 down payment my purchasing power goes up to $400,000. Remember that with lower down payment you have to buy PMI. For a loan of $200,000 and a %10 down payment your payments might be around $80 a month. PMI payments are usually paid as part of your monthly mortgage payment and are placed in escrow until it is time to pay the premium

In the mortgage business, it protects the lender against loss if the borrower defaults on the loan and by enabling borrowers with less cash to have greater access to home ownership. Meaning, you can buy a home with a three to five percent down payment without waiting years to save up a large sum of money. However, if the lender is unable to recover costs after foreclosure and sale of the property, they receive 15 percent of what you did not pay at closing.

Learn more about Obama Mortgage Relief Plan Qualifications.