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Housing Counsel

Homeowners Should Try To Unload PMI

By Benny L. Kass
Saturday, April 9, 2005; Page F06

Several years ago, we paid $200,000 for our house. We barely were able to scrape up $20,000 and took out a 90 percent loan for $180,000. Because we did not have enough for a 20 percent down payment, we had to obtain private mortgage insurance, called PMI. Since then, in addition to our regular mortgage, we have been paying about $75 a month for PMI. Because of this wonderful real estate appreciation, our house is now worth almost $300,000. Is there any way, other than refinancing our loan, to get rid of this PMI obligation?

The answer depends on the current amount of your loan and not on the current value of your property. You should talk with your mortgage lender about this. In my opinion, PMI is not insurance you really want. To the extent possible, you should try to avoid it if you are purchasing a new home, or you should try to have it removed from your current mortgage.

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In 1998, Congress enacted the Homeowners Protection Act, which became effective in 1999. This law covers your rights in regard to PMI.

First, let's understand PMI. It should not be confused with homeowners insurance, often called hazard insurance. Homeowners insurance protects the homeowner in the event of a problem, such as fire or theft. PMI protects the lender against financial loss if the homeowner defaults and the house has to be sold at a foreclosure sale. If, for example, your house has a loan balance of $175,000, but at foreclosure sells for only $150,000, PMI will pay the lender the difference.

Unfortunately, you, as the homeowner, pay these premiums. Until recently, you would have had no choice -- you had to take the insurance -- and the premiums are not cheap. As you know from your own experience, if you put 10 percent down on a $200,000 house bought with a 30-year fixed rate mortgage, you would pay about $75 per month in mortgage premiums. If you had put only 5 percent down, the PMI premiums would have been $120 per month.

Keep in mind that you should not be required to obtain PMI if you put at least 20 percent down when you purchase your home. 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.

The private mortgage industry makes the argument that if you do not have enough cash to make a 20 percent down payment -- and if you really want to buy a house -- PMI is the only way to go. But in recent years, lenders have come up with alternatives.

One such approach is known as the "80-10-10" loan. Under this arrangement, the borrower must have a minimum of 10 percent cash to put down. The lender makes you two loans: one for 80 percent, and the other (a second trust) for 10 percent. Because the first deed of trust (mortgage) is just 80 percent of the purchase price, it is considered a conventional loan and no PMI is required. The second trust carries a higher rate of interest, but is clearly tax deductible. More important, you can pay off the second trust; removing PMI is often difficult, notwithstanding the Homeowners Protection Act.

Some lenders have created a program whereby they pay the mortgage insurance but pass those premiums on to the borrower in the form of a higher mortgage interest.

There are two important questions frequently asked about PMI: Can I cancel the insurance? Are the payments tax-deductible?

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