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Private Mortgage Insurance (PMI)
Low down payment mortgages are somewhat
risky for lenders because people are more likely to default
on a loan in which they have very little money invested. If
a default occurs, the lender must sell the home and pay
foreclosure costs out of the proceeds, before applying any
money to the loan balance. Lenders often lose money on
foreclosures.
Lenders generally require us to purchase
private mortgage insurance (PMI) if you are borrowing more
than 80 percent of the value of the home you are purchasing
(i.e., your down payment is less than 20 percent). PMI
guarantees your lender will be paid if you default on your
mortgage. PMI does not protect you against losing your house
in the event of a default, however. Moreover, the insurance
company may be able to seek recourse against you for any
default claim they pay to your lender.
How much does PMI cost?
The cost of PMI depends on several factors, such as the
amount of your down payment, the type of mortgage you take,
and whether you pay premiums on a monthly basis or in a lump
sum at closing. PMI premiums can commonly increase your
monthly housing cost, but without it, you may be unable to
qualify for a mortgage.
Can you cancel your PMI coverage?
PMI protects the lender, not the borrower. Thus, lenders
generally want to keep PMI coverage on your loan for as long
as possible. Of course, since you pay the premium, you will
want to cancel the policy as soon as you are able. Before
taking a mortgage, ask your lender about PMI cancellation
policies. Some lenders will not allow PMI coverage to
terminate during the life of the loan, while others simply
require an appraisal showing you have 20 percent equity in
the home and a clean payment history. Equity can be built in
several ways. Your equity increases when the principal
balance on your mortgage decreases, and also when the value
of your home increases (because of improvements to the home
or fluctuation in market value of homes in your area). If
your lender states that your policy can be canceled once you
reach a certain equity level, get written confirmation.
Are there any mortgage types which do
not require PMI?
Some mortgages (such as FHA loans and VA loans) are insured
by the government. Although a low down payment is usually
acceptable on these mortgages, PMI may not be required.
Is there any way you can avoid paying
PMI?
If you don't have at least 20 percent for a down payment,
there may be an alternative to paying PMI premiums. Consider
asking if your lender is willing to increase your mortgage
interest rate a quarter of a point, rather than require PMI
coverage. Your monthly payment will increase by roughly the
same amount as the monthly insurance premium. However,
mortgage interest is tax-deductible, whereas PMI payments
are not.
Title Insurance
In basic terms, title is your right to
own, possess, use, control, and dispose of property. When
you buy a home, you are actually buying the seller's title
to the home. A deed is the written legal evidence that the
seller has conveyed his or her ownership rights to you.
Before the closing meeting when the actual
transfer of ownership occurs, an attorney or title
specialist generally conducts a title examination. The
purpose of the title examination is to discover any problems
that might prevent you from getting clear title to the home.
Generally, title problems can be cleared up before
settlement. But in some cases, severe title problems can
delay settlement, or even cause you to consider voiding your
contract with the seller.
What are some common title problems?
Title problems come in all shapes and sizes. Following are
just a few examples of situations that can create a title
problem:
- You are buying a house from a single
man or woman, but the title search reveals two names on
the ownership record and describes them as married.
- The home you are buying was owned by
the seller's parents, who intended to use it for their
retirement. The seller's father died several years ago,
and the mother just recently passed away. A title search
reveals that the property is titled in the mother's
name, but there is no will on file to indicate how she
disposed of it.
- You are buying a house to which an
addition was made several years ago. The sellers of the
home took out a home improvement loan and did the work
themselves. They have repaid the loan, but the lien was
mistakenly never removed from the title.
- The seller of the house added central
air conditioning several years ago. The seller and the
contractor had a dispute over the workmanship, and the
seller withheld the final payment on the contract. The
contractor filed a mechanic's lien on the property,
which has never been removed.
- You are buying a house with a newly
paved driveway. The seller of the house bought his
neighbor's share of their shared driveway and converted
it into a private driveway when the neighbor built a new
driveway on the other side of his house. Unfortunately,
the expanded driveway doesn't appear in the public
records.
As mentioned above, some title problems
are easily corrected, while others can be very difficult to
resolve. You should insist on being kept informed of every
step in the title checking process. If title problems are
uncovered, it is important for you to understand your legal
rights.
What is title insurance?
Title insurance is the best way to protect yourself against
title defects, which may not appear until after you've taken
ownership of the property. Before a title insurance policy
is issued, a title report is prepared based on a search of
the public records. This report gives a description of the
property, along with any title defects, liens, or
encumbrances discovered in the course of the title search.
Title insurance protects you against title defects that were
not discovered in the course of the title search (for
example, forged signatures). If such a defect is later
discovered, your title insurance would cover you.
How does title insurance protect you?
If title problems are severe enough, you could actually lose
your house. A title insurance policy protects you and your
heirs against title defects for as long as you own the
property. The policy represents the title insurance
company's responsibility to compensate you for any covered
loss caused by a defect in the title, or any lien or
encumbrance that was not discovered in the title search.
Most title insurance policies do have exceptions, however,
so it is important to understand the policy.
What if a lender makes you buy lender's
title insurance?
That isn't enough. Most mortgage lenders require you to take
out lender's title insurance when you get a mortgage. This
type of policy protects the lender's lien on the property,
and makes the mortgage more attractive on the secondary
market. Coverage on a lender's policy is limited to the
amount of the loan, and gradually decreases as the loan is
paid off. However, a lender's title insurance policy does
not protect your full interest in the property. You should
consider purchasing a separate owner's policy to protect
your interest in case of title defects.
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