Maybe PMI Isn’t “Bad,” After All
Many new home buyers avoid mortgage insurance at any cost.
Some delay home buying because of it, but that could be a mistake.
Home prices are rising six percent per year, according to the National Association of REALTORS®. Wait to save a high downpayment, and you could be chasing home prices for a long time.
Mortgage insurance lets you buy at today’s prices and low mortgage rates. It eliminates risk of both skyrocketing in the future.
But that’s not the only benefit of private mortgage insurance (PMI).
In addition, PMI companies often offer valuable services most homebuyers don’t know about — partial claim advances and job loss insurance coverage.
Those “silent” benefits might prove very useful in your life as a homeowner.
The Partial Claim Advance: When You Can’t Pay Your Mortgage
Lenders typically require a 20 percent downpayment to remove the PMI requirement.
There’s a simple reason. If mortgage payments are not received, the lender must sell the property to recoup costs. Credit rating agency Standard and Poor’s (S&P) estimates that a lender receives about 20 percent less selling a foreclosed home than would in a regular sale.
The legal fees, real estate commissions, property taxes and maintenance typically come to an additional ten percent of the loan balance. Here’s how that shakes out on a $300,000 home purchase with 5% down:
- Gross foreclosure sale proceeds: $240,000
- Principal balance: $285,000
- Foreclosure costs: $28,500
- Loss: $73,500
That’s a potential loss of $73,500 for the mortgage insurer. The mortgage lender gets its money back, so it won’t hesitate to pursue foreclosure.
The PMI company, however, is on the hook for $73,500. At all costs, the PMI provider wants to prevent foreclosure.
If, for example, it can cover your missed payments and stop your foreclosure for $7,000, the insurer minimizes its losses – helping you while it helps itself.
What Is A Real Estate Closing?
Real estate closings go by different names, depending on where you live.
In some parts of the country, they’re known as “closings” and in others, they’re known as “settlements”.
In California, closings are known as “escrow” (which is not be to confused with this other escrow).
Regardless of where you live, however, the purpose of a closing is the same — to legally transfer ownership from seller to buyer; and, for homes financed with a mortgage, to sign the appropriate home loan documents.
Other documents are signed at closing, too, including certain disclosures and guarantees. Buyers can expect to sign and/or initial 150 times or more.
Shop Around For PMI
Lenders typically select your mortgage insurance for you.
They often work with two to four PMI companies. Each lender has its own policy for selecting PMI providers; some select at random. Sometimes, only one company will provide PMI based on your downpayment, credit score, or loan type.
However, as the consumer you can request that your lender select a specific PMI provider.
If job loss mortgage insurance is important to you, make sure, first, that your lender works with a mortgage insurer that offers this protection.
Then, request that every effort is made to get your application approved by this mortgage insurer.
Keep in mind, however, that the ability to shop for PMI can only be done when opting for a conventional loan that conforms to Fannie Mae and Freddie Mac rules. The typical U.S. lender offers these loans.
FHA and USDA mortgage insurance is provided by government agencies, not private companies. You can’t select different mortgage insurance when using these government-backed programs.
But conventional loan borrowers can and should research private mortgage insurance providers for the benefits that suit their needs.
As a future PMI-paying homeowner, you could have advantages over someone who makes a 20% downpayment. Maybe the expense of PMI isn’t as bad as everyone said it was.
