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Housing Counsel

Buyers Often Have Little Recourse in PMI Battles

By Benny L. Kass
Saturday, December 25, 2004; Page F06

Q When I was arranging my mortgage, my down payment lost ground. Instead of having enough money to put down 20 percent, I could only muster 17 percent. Initially, I was going to get an 80 percent loan. My mortgage coordinator advised that instead of borrowing or taking a second mortgage for that small amount, I should opt for private mortgage insurance to cover the difference.

Her rationale was that within a few months, the market value of my house would have increased by 3 to 5 percent, at which time I could have the PMI dropped. With only a few days left before settlement, I followed her advice.

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I now have to pay $105 extra each month. Recently, I approached my lender to determine the process for dropping this. I was shocked to find that they will not release me for two full years, and my equity must be at least 25 percent.

Do I have any recourse or am I stuck with their terms? I have a favorable interest rate and certainly do not want to refinance.

AYou were given bad advice by your mortgage coordinator.

Private mortgage insurance should not be confused with homeowners insurance, also called hazard insurance. The latter protects the homeowner in the event of a problem, such as fire, theft or other home damage. PMI protects the lender against financial loss if the homeowner goes into default and the house must be sold at foreclosure. For example, if your house has a loan of $250,000, but at foreclosure sells for only $200,000, PMI will pay the lender part of the difference.

You, the homeowner, pay these premiums. You generally have no choice -- if you take the loan, you must take the insurance, and the premiums are not cheap. If you put 10 percent down on a $200,000 house purchased with a 30-year fixed rate mortgage, you will pay about $75 per month in PMI premiums. On the other hand, if you put down only 5 percent, the premiums jump to $120 per month.

The private mortgage industry makes a strong argument in favor of PMI. According to the Mortgage Insurance Companies of America, the association that represents the insurers, "Private mortgage insurance is quite simply the easiest, most flexible and least costly way to buy a home with a low down payment. With private mortgage insurance, you can buy a home with as little as 3 to 5 percent down payment instead of the 20 percent down payment lenders traditionally have required for loans without insurance.

Lenders have learned that if you have less than 20 percent equity in your house, you are more likely to default on your mortgage loan. That is why the magic mark is 20 percent down.

If you do not have enough cash to make a 20 percent down payment -- and if you really want to buy a house -- PMI used to be the only way to go. But in recent years, lenders have come up with alternatives.

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