Private Mortgage Insurance, OH MY!

Among the fees that homeowners have to pay is something known as MI, short for Mortgage Insurance. There are two versions of this product, one is from the private sector called PMI and the other from the government and goes by the acronym MIP which stands for Mortgage Insurance Premium. None of the policies covers sub prime loans.

. PMI.
PMI is needed when a borrower has less than 20% down. It is a policy that insures the Lender in case the borrower fails to make payments. That coverage is limited to the difference between the actual down payment, if any, and the 20% requirement; for example if a borrower puts down 5% of the purchase price amd the policy will cover 15%. The Lender will get 15% of the purchase price from the Insurance company if the borrower stops making the payments AND the property through foreclosure. The logic here is that the Lender can recover his funds through the sale of the foreclosed property, and the borrower looses his down payment and any appreciation.

. HOW TO AVOID PMI:
1. Put down 20%
2. Take a hybrid mortgage like the famous 80/20 which is in essence a 80 % first mortgage and a 20% second mortgage that usually carries a higher interest rate.
3. Take a sub prime loan if you still can find one.

. MIP.
Loans insured by the Federal Housing Administration (FHA) are subject to the MIP. A reminder to our readers, FHA does not issue mortgages, it only insures them, Lenders provide the financing. FHA charges two fees for its service, a one time fee which is a percentage of the loan amount and a monthly fee collected with each payment. The current premium rate is 1.5% of the loan amount: for example a $100,000 mortgage carries a $1,500 fee payable at closing, this fee is usually financed i.e. included in the loan in order to reduce the borrower's initial cash outlay. MIP is mandatory.
Just like the PMI, FHA collects a monthly payment for its insurance for all mortgages with the exception for those with a 15 years term and mortgages covering condominiums.

. DEDUCTIBILITY.
Unlike interest paid on mortgages, PMI and MIP ate not deductible. There is a law recently passed by Congress (H.R. 3648) that will allow the deductibility of mortgage insurance. We have to wait until the law is enacted.

Next time someone mentions MIP or PMI, you will know what he is talking about. Mortgage insurance should be renamed Lender's insurance to avoid confusing it with auto insurance.