Housing News

Are PMIs Low Income Earner Friendly?

The credit crisis sends fears among insurers.

For years, borrowers have relied on private mortgage insurers (PMI) to secure lower down payments for their home purchases. Lenders on the other hand are protected from losses out of defaults by guaranteeing payments not made by the borrower. These can include carried-on interest from delinquent payments, broker’s fees, maintenance and repair costs and closing costs. While they may be helpful, mortgage insurance has racked up its fees in the past months. According to mortgage analyst Dan Green in his blog, “Private mortgage insurance premiums are on the rise because mortgage defaults are on the rise. It would be like Tampa Bay getting hit by Hurricane Phil, causing the insurance companies to unilaterally raising their cost of Bay Area coverage. Once bit, twice profitable, they always say.” The downturn in the housing market has led the Mortgage Insurance Companies of America to report a 77.4 percent drop YoY in mortgage insurance applications last November.

For low income earners, getting mortgage insurance may be more difficult. The insurance won’t always come as a relief but another financial burden that they have to comply with. Nevertheless, it leaves them no choice because the lender is posed with a higher risk by the borrower’s monthly earnings. They can avoid paying for the insurance on the other hand but they wouldn’t be able to afford more than 5 percent equity or pay at least 80 percent of their loan. In most mortgages though, the PMI is mandatory for loans where the downpayment is less than 20 percent of the house’s value.

The Federal Housing Administration’s mortgage insurance covers homebuyers who belong to lower income levels and can’t avail of conventional mortgages. Among its features include lower downpayment of 3 percent against a traditional loans’ 10 percent, the up-front premium are added to the regular mortgage payment and regulated limited fees for the borrower. Only owner-occupants can avail of the program. You cannot cancel your insurance with an FHA loan however, other loans permit you to do so once your equity has reached 20 percent. That means you have reached a sufficient amount of equity in your home.

The bottom line is that it’s the lender who will benefit from the insurance once you default. It’s not your protection but his. It’s important therefore that borrowers especially low-income earners must be aware of a PMI’s nature to avoid unnecessary costs once enough equity has been established.

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