Sarasota, FL, July 22, 2012 --(PR.com
)-- Historically low interest rates are tempting more and more homeowners to refinance their mortgages. People who took out home loans just a few years ago could save 2% or more in interest if they refinanced to today’s rates.
However, because of the recent drop in home values, many potential refinance candidates are finding themselves in a Catch 22. Even if they do not owe more than their homes are now worth, fewer people have enough equity in their homes to meet the 80% loan to value requirements. They can still refinance, but will have to pay private mortgage insurance, or PMI.
What is PMI?
PMI is extra insurance that lenders require from borrowers who obtain loans that are more than 80% percent of the home's value. Although the homeowner pays the insurance premiums, PMI protects the lender should the borrower default on the loan.
The cost of this insurance depends on the current loan to value and the interest rate, and is typically about one-half of 1% of the loan. For a home valued at $200,000, with 10% equity and 4% interest rate, the PMI would be about $78 a month.
Understandably, people are reluctant to add an extra price tag to their monthly payment for a PMI policy. But in many cases, refinancing to a lower interest rate – even with PMI insurance – can lower the monthly payment and save tens of thousands of dollars or more over the life of the loan.
Furthermore, “due to recent FHA mortgage insurance changes (both upfront and monthly), a non-FHA loan with mortgage insurance might be a cheaper solution for those who can’t put 20% down,” said Mortgage Alliance member Joseph Knight of Gulf Coast Mortgages. “Mortgage insurance is also available to second home purchases where FHA is only for primary purchases and refinances.”
Keep in mind that PMI is not a permanent requirement. If the home’s value increases, or if the homeowner has paid down enough of the mortgage to meet the 80% rule, the PMI coverage is no longer required.
Because in the past many lenders were negligent in informing homeowners when they had achieved enough equity to drop the PMI insurance, the Homeowner's Protection Act (HPA) was passed in 1998. With a few exceptions, the Act applies to mortgages for single-family homes serving as primary residences, obtained on or after July 29, 1999 (VA or FHA loans are excluded from this regulation).
Homeowners have the right to request cancellation of the PMI coverage when they reach 20% equity. Moreover, lenders are required to automatically drop the PMI when a 78% loan to value is reached, barring any liens on the loan. This does not always happen automatically, however, so the borrower is advised to be vigilant and keep track. If the loan is delinquent on the date of automatic termination, the lender must terminate the coverage as soon as the loan becomes current.
If the loan was signed before July 29, 1999, the borrower can ask to have the PMI canceled once they reach 20% equity, but federal law does not require the lender to do so.
The lender may require proof that the value of the property has not declined since the loan was obtained and that the property does not have a second mortgage.
Some lenders will waive PMI coverage if the borrower pays a higher interest rate on the loan, typically .75% to 1% more interest. The advantage is that mortgage interest is tax deductible, whereas mortgage insurance is not.
To determine whether it’s worth refinancing under your particular circumstances, even if you have to pay PMI, please contact Joseph Knight and mention this article. Telephone: (941) 378-1356. Email: firstname.lastname@example.org.
The Mortgage Alliance of Southwest Florida is an alliance of independent non-bank mortgage professionals who offer and promote leadership, local knowledge, high professional and ethical standards, and a customer-focused approach to mortgage lending.
The Mortgage Alliance of Southwest Florida
c/o Blue Skye Lending
8130 Lakewood Main Street, Suite 205
Lakewood Ranch, FL 34202
Media Contact: Sheila Brannan Longo
Thomas & Brannan Communications, (941) 355-3006