Private mortgage insurance (PMI) is a type of insurance that is designed to protect a mortgage lender from the consequences of default by the borrower. When searching for Longmont Colorado homes, you will find this information useful to finally complete your transaction. The insurance is often mandatory as we shall see a little later and the premiums are borne by the borrower. It must be clearly understood that the borrower does not directly benefit from PMI and the insurance is for the benefit of the lender.
Lenders will generally stipulate PMI cover where there is a low down payment on the mortgage. Most lenders expect a down payment of at least 20 percent and will expect PMI to cover themselves for down payments less than this. The borrower benefits because he is able to get access to a loan even if he doesn’t have much money to make a down payment. Naturally, a loan with a low down payment carries a higher risk of financial loss in the event of default on the lender will wish to cover himself.
In addition, the availability of mortgage insurance enables lenders to consider what they regard as high-risk loans which cannot be sold on to third parties such as Freddie Mac (Federal Home Loan Mortgage Corporation) and Fannie Mae (Federal National Mortgage Association). Retaining the option to sell mortgages is an extremely important source of liquidity to mortgage lenders as they can use these funds to create new mortgages.
The costs of private mortgage insurance (PMI) depend on the size of the loan and the down payment that the borrower makes. The typical cost of PMI would be about 0.5 percent of the value of the loan and the borrower is required to pay this in monthly installments together with his mortgage repayment. The borrower should try and ensure that, in terms of the Homeowners Protection Act, the insurance will automatically be terminated when his home equity reaches 20 percent (in other words, when the loan outstanding reaches 80 percent of the original amount). The other alternative, which is slightly more expensive for the borrower, is to make a request to the lender to terminate the PMI is home equity reaches 20 percent of the lender will generally oblige only at the 22 percent level.
Interestingly, it appears that one way to avoid the costs of PMI is to get a loan from the rural division of the US Department of Agriculture (USDA). The maximum loan available is actually 102 percent of the appraised value and your credit standing does not have to be that high. The USDA created this program to encourage the development of rural housing and your eligibility is determined by the population density of your location and your household income. No PMI is required. You can check out this program at the web site http://www.rurdev.usda.gov.
Now that you are looking to buy a new home, you may also want to look at real estate in Denver CO and Erie CO for the different options available to you.
