Private mortgage insurance (PMI) is insurance for the mortgage lender in the event of homeowner default.
PMI helps the lender recover its costs and losses after foreclosing and selling a repossessed home.
PMI rates vary by loan type, loan size, and loan characteristics. The higher the risk to the bank, the higher the cost of PMI.
The two types of PMI are:
- Borrowed-paid mortgage insurance
- Lender-paid mortgage insurance
Borrower-paid MI is the more common version of PMI. It may be payable up front, payable monthly, or both. However, once the mortgage balance is reduced to 80% of the home’s value, PMI may no longer be required by a lender.
This reduction can occur by principal being paid down, home appreciation, or a combination of the two.
With lender-paid PMI, there is no monthly payment because the mortgage note’s interest rate is increased and is, therefore, “self-insuring”. That is, the lender collects higher payments each month and usually buys an insurance policy with the extra proceeds.
Different from private mortgage insurance is another type of insurance called homeowners insurance, or hazard insurance.
HOI is property insurance that protects against losses in the event of a catastrophe.
Mortgage lenders require borrowers to carry homeowners insurance because it protects the bank if the home is destroyed. However, it’s a good idea to have additional coverage for personal property and for liability related to accidents that occur on-site.
For example, if a home is destroyed in a fire:
- The homeowners insurance will repay the lender for the amount due on the mortgage
- The personal property insurance will repay the homeowner for personal possessions destroyed
- The liability insurance will protect the homeowner from third-party claims related to the fire
HOI is typically paid in annual installments to an insurance company and rates vary by type of home and type of coverage requested.
Private Mortgage Insurance
The headlines say that home prices are down 6.7 percent from a year earlier. It’s important to recognize that this is a national figure.
“National” has nothing to do with real estate. Real estate is local.
The chart above is from the latest S&P/Case-Shiller home-price index and — averaged out — shows that home prices are declining nationwide. Some areas are showing growth (or flatness):
And, in every town included in the survey, there are neighborhoods that are faring quite well, despite an overall sluggishness.
Real estate prices are local. Street by street even. National surveys like the S&P/Case-Shiller home-price index paints a broad picture of our nation’s real estate market, but that level of reporting doesn’t do much on a level that’s actually relevant to Americans.
Pace of Decline In Home Prices Sets a Record
James R. Hagerty And Kelly Evans
The Wall Street Journal Online, December 27, 2007
During the Holiday Season, economists watch consumer spending intently because it makes up two-thirds of the U.S. economy.
When spending is stronger-than-expected, it can lead to inflation which pushes mortgage rates higher.
So far this season, mortgage shoppers should be in good spirits. Sales have fallen four weeks in a row and the outlook for a late-December rally are bleak.
But there’s more to the story than the headline, though.
When store report “sales” data, they don’t report gift card sales.
Gift cards are only accounted for when they are redeemed for actual store merchandise.
So, with gift card sales projected to reach $26 billion this year, there is a $26 billion “shortfall” in the sales figures. That $26 billion will likely get booked in January when shoppers spend their “free money”.
For as much as mortgage rates may fall on weak sales data in December, therefore, rates could surge higher when January’s sales data is released.
Higher sales levels can lead to inflation and that is the enemy of mortgage bonds. WIth inflation comes higher mortgage rates.
Retail Rush Falls Short, Now Come More Sales
Kris Hudson, Ann Zimmerman And Vanessa O’Connell
The Wall Street Journal Online, December 26, 2007
The week between Christmas and New Year’s Day is notoriously slow in a lot of industries. Many Americans take vacations or time off from work.
Those that do go to work are often less productive.
On Wall Street, fewer “workers” means that liquidity leaves the market. With fewer buyers and fewer sellers of a given security, its prices can move more wildly than normal.
For homebuyers, this means that mortgage rates can move more wildly than normal, too. Mortgage rates are derived from the price of mortgage bonds, a security.
This is one reason why, after touching their best levels in two years, mortgage rates charged higher with force last week. This move was fueled partly by renewed fears of inflation; partly by the season.
Between Wednesday, Thursday and Friday last week, mortgage rates had risen 0.375% on most products. This morning, the trend continues.
Movement at this speed is atypical but this week is atypical, too.
Expect that mortgage rates will show the same volatility until January 2, 2008. With more traders showing up for work, liquidity will return to markets, stabilizing mortgage rates.
After Thursday’s passage of the Mortgage Forgiveness Debt Relief Act of 2007, foreclosed homeowners have one less worry: taxes.
When a homeowner defaults on a home loan, a mortgage lender will sometimes “forgive” the debt owed.
One example is when a foreclosed home sells for less money than is owed on it. The mortgage lender will sometimes accept this lesser amount, while considering the mortgage to be “paid in full”.
This is often called a “short sale” because the lender is “short” of the full amount owed.
Prior to Thursday, the IRS treated the forgiven mortgage debt as taxable income. This added thousands of dollars to a foreclosed homeowner’s tax liability.
A $50,000 short sale, for example, could yield an additional $12,500 in taxes owed.
After the bill’s passage, that tax liability is gone. No taxes will be owed on primary residence mortgage debt that is forgiven or written off by a mortgage lender.
The bill has two sides, though.
In order to recover the estimated $650 million in tax revenue that will be lost, Congress has limited the amount of tax breaks available on the sale of second/vacation homes. That will be impactful on homeowners, too, of course.
If you think the Mortgage Forgiveness Debt Relief Act of 2007 will impact you personally, be sure to talk with your accountant.
The resurgence of private mortgage insurance continues — if only because it’s aided by Congress.
For eligible homeowners, lawmakers voted to extend the tax-deductibility of PMI through 2010. The law was previously scheduled to expire at the end of 2007.
For all loans originated prior to December 31, 2010, and within those years, private mortgage insurance is 100% tax-deductible provided that two tests are met:
- The homeowner’s household income is $100,000 or less in the calendar year
- The home loan is for a primary or secondary residence
For households earning more than $100,000, the deduction is phased out to the tune of 10% per $1,000 of additional income until it reaches 0% at $110,000.
So, if a single person earns $90,000 in 2007 and buys a home using PMI, the PMI expenses are tax-deductible in 2007. If that person’s income exceeds the threshold prior to 2010, the deduction is phased out.
As always, talk with your tax professional about how tax deductions work and whether you qualify for a PMI deduction.
Even if you’ve been recently pre-qualified (or pre-approved) for a mortgage, it may be prudent to get “re-approved”.
The mortgage industry is changing quickly; being prepared beats the alternative.
Recently, mortgage lenders have made adjustments in what they will lend, and to whom. This shrinks the pool of eligible mortgage borrowers.
Some of these guideline changes include:
- Low or no downpayment loans may require more income and/or assets
- No income verification (i.e. stated) loans may not be available
- Higher credit scores may be necessary to qualify
In addition to tighter guidelines, many mortgage lenders are now required to pass higher fees and/or mortgage rates along to their clients as well.
The burden of these mandatory extra costs will be the difference-maker in a mortgage approval for some mortgage applicants.
Getting re-approved can give home buyers a realistic sense of how mortgage financing may shape up in the changed mortgage environment. It’s important to make sure that the mortgage plan still fits into your short- and long-term financial goals.
But, if nothing else, getting re-approved gives you the opportunity to speak with your real estate and loan officer about changes to the industry, and how it impacts you on a personal level.
For most Americans (but not all), mortgage interest is tax-deductible in the year in which it was paid.
With some advance planning, therefore, a homeowner can increase his 2007 tax deductions by paying additional mortgage interest while the calendar still reads 2007.
The key is to make the mortgage payment due January 2008 a few days early.
Because mortgage interest is paid in arrears, a mortgage payment due January 1, 2008 accounts for interest that accumulated throughout December 2007.
Rather than make January’s mortgage payment on January 1, 2008, a homeowner can send payment this week or next — while it’s still 2007 — and increase the amount of mortgage interest paid in 2007. This can increase 2007’s tax deductions.
Tax planning can be a complicated issue and not all homeowners qualify for mortgage interest tax deductions. Be sure to consult your tax professional before making any tax planning decisions. If you are without a tax professional, call or email me; I would be happy to make a trusted recommendation to you.
While holiday shopping, stores bombard us with offers to save “10% or more”, just for opening a new credit card account.
Saving money is good thing, but if you’re planning to buy (or remortgage) your home in the next six months, be wary of how that new credit card can come back to bite you.
Each time you apply for a new credit card, you weaken your overall credit profile, dropping your credit score.
According to myFICO.com, “New Credit” makes up 10 percent of your credit score and includes:
- The number of new credit accounts created
- The ratio of new credit accounts to all credit account
- The category of credit to which the new credit accounts belong
- The time since the new credit accounts were established
Mortgage lenders use credit scores to predict the likelihood of a homeowner not paying on a home loan. The lower the score, the more likely a homeowner is to default.
Lower scores, therefore, have higher mortgage rates attached to them — and may have higher fees attached, too.
It’s okay to sign up for new credit cards at your favorite stores, but be aware of how it may impact your credit score. If you are not applying for a new home loan in the next six months, chances are that you’ll be alright.
But, if you will need a new home loan, consider whether saving 10 percent on a $100 purchase is worth paying an extra 0.125% on your new mortgage month after month.
It is common practice for single homebuyers to pool their assets and incomes in order to buy a larger home than either buyer could afford on their own, separately.
In this video clip from The Today Show, Barbara Corcoran makes strong recommendations on how to co-purchase a home “the right way”:
- Hire an attorney no matter what
- Draft property and co-habitation agreements
- Consider term life insurance policies for each other
Although the piece highlights two 26-year-old women in New Jersey, the same co-purchase plan can work in any town, and with any two (or more) people.
The key is to protect your interests with a well-worded contract.