A guide for homeowners: What is private mortgage Insurance?, by Briana Frazier.

By Briana Frazier

A Guide for Homeowners:

What is private mortgage insurance?

Being able to put down a down payment is difficult and you are not alone. According to a 2017 survey conducted by the Urban Institute, at least 53% of Americans cited the difficulty in saving for a down payment as the number one barrier to homeownership-something that makes the dream of owning a home just that, a dream.

It is important first to understand why banks require a down payment. For banks, lending to individuals is risky. If a person defaults on the loan for whatever reason, the bank will take the brunt of this financial loss. The banks, therefore, need the homebuyer to prove their financial commitment to the loan. Additionally, it shows that the home buyer can comfortably make monthly mortgage payments.

But all this is dependent on how much a homebuyer puts down. FHA loans require as low as 3.5 percent of the total loans. As low as this may seem, it does attract an additional fee, the Private Mortgage Insurance (PMI).

WHAT IS PRIVATE MORTGAGE INSURANCE?

Private mortgage insurance is also referred to as lender’s mortgage insurance. It is an insurance policy that a homebuyer must purchase if they cannot put at least 20 percent of the loan as a down payment. It is usually a condition of a conventional mortgage loan.

The 20% rule is based on the mortgage’s loanto-value (LTV) ratio. The higher the ratio, the higher the risk for the lender. Therefore, putting down anything less than 20 percent, the ratio is significantly higher and will need additional coverage. The PMI, though purchased by the homebuyer, protects the lender’s investment.

WHAT DETERMINES THE PMI?

The costs associated with PMI range from 0.25 percent to 2 percent of the home buyer’s loan balance. The rate at which the homebuyer will be charged is dependent on three things. The loan size and the homebuyer’s credit score will be put into

consideration. Finally, there are the risk factors associated with the homebuyer. The higher they rank on the lender’s risk profile, the higher the rate.

IS PMI A LONG-TERM EXPENSE?

YES, the PMI is an added expense, but it provides a reprieve to homebuyers that cannot make the 20 percent down payment. There is a downside to this; homebuyers have to make monthly payments until the house accumulates enough equity on the home. At which point, the lender will no longer consider them a risk. The homebuyer can request for the elimination of the insurance payments if the LTV drops to 80 percent. The lender is required by the Federal Homeowners Protection Act to cancel the payments when the LTV drops to 78 percent and only if the homebuyer is current on their mortgage payments.

TYPES OF PMIs.

There are four types of Private Mortgage Insurance. The first and most common type is the Borrower-Paid Mortgage Insurance (BPMI). With this kind of insurance, a homebuyer pays a monthly fee together with their monthly mortgage payment. The second type is the SinglePremium Mortgage Insurance (SPMI), where a homebuyer pays the mortgage insurance in a lump sum upfront. The third is the lender-paid mortgage insurance. As the name suggests, the lender pays the insurance premium. The condition to this is that the homebuyer will have to pay a higher interest rate to cover the loan, and because of this, you can’t cancel the PMI when you have enough equity in the home. Split-Premium Mortgage Insurance is the final and least type of PMI. It is born of the BPMI and SPMI, in which case the home buyer pays a portion of the premium in a lump sum and Being unable to make a 20% down payment should not keep you from achieving the American dream. With as low as a 3.5% down payment you have access to a FHA loan and one step closer to homeownership. The private mortgage is a small price to pay. It is an additional short-term expense, but it beats paying rent long-term. As a homebuyer, start believing that homeownership is achievable. You do not have to have the recommended 20 percent. With the PMI, you can become a homeowner a lot sooner than you expected. Another great thing with PMI is that it’s not a one-size-fitsall; there are different types to choose from- Get the best one for you. The process might sound hard to do alone but with qualified counsel from the processionals at The Power Is Now Media Inc., it will be a burden off your shoulders.

ABOUT THE AUTHOR.

Briana Frazier Cannon, Broker of Frazier Group Realty, has over 15 years of real estate sales and property management experience. She is well known in the industry and with her clients as Broker Bree. Briana specializes in home buyers and home listings. She has sold millions of dollars in real estate and takes pride in helping first time buyers enter homeownership. Briana has a Bachelor’s degree from the University of California, Riverside and a Master of Business Administration from Chapman University. Her corporate office is located in downtown Riverside, but she covers all of Orange County and Riverside county. Briana is a member of the California Associations of Realtors and her local Realtor associations. When Briana isn’t taking clients on showings, holding open houses or managing her clients’ transactions she is a busy mom to her three beautiful young children and wife to her husband of 10 years. Briana also loves adventure, traveling and baking on her free time.

ABOUT THE POWER IS NOW MEDIA, INC.

The Power Is Now Media Inc. is an advocate for the empowerment of the minority communities all over the United States. We engage with various thought leaders to make sure that you are equipped with knowledge about our economy. We have partnered with First Bank to provide you with products and services that will help you prepare better for the future. We are also advocating for first-time home buyers. The Power Is Now Media Inc. can help your home ownership dream a reality. Go to www. neverrentagain.com and get started today. Eric Lawrence Frazier MBA DRE, Vice President and Mortgage Advisor of First Bank, NMLS 461807 President and CEO of The Power Is Now Media Inc. www.thepowerisnow.com

Sources:

https://www.investopedia.com/terms/m/mortgage-insurance.asp https://www.urban.org/sites/default/files/publication/99028/barriers_to_ accessing_homeownership_2018_4.pdf