How Does PMI Become a Deal Killer?

PMI or Private Mortgage Insurance has gone through some major changes. Some insurers have literally raised the bar on the cost of mortgage premiums. I have seen instances where the premiums were so high on a $200,000 house it literally made the property unaffordable for the buyer. That reality is the basis for this article.

What Is Private Mortgage Insurance?

Private Mortgage Insurance is extra insurance that lenders require from most home buyers with less than a 20 percent down payment. Typical rates are $55/mo. per $100,000 financed, or as high as $1,500/yr. for a typical $200,000 loan. Quick estimates for mortgage premiums are about 0.5% per month.

The cost of mortgage insurance varies considerably based on several factors which include: loan amount, LTV, occupancy (primary, second home, investment property), documentation provided at loan origination, and most of all, credit score.

Benefits of PMI PMI protects a lender against loss if a borrower defaults on a loan. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment. Even though the homeowner pays for the insurance, it is the lender that gets the benefit.

The circumstances of a real estate closing for a first time home buyer are very different for an experienced real estate professional. Because you have not seen the numbers on a contract or closing statement before, you have no basis for comparison.

For example, I saw a PMI premium recently for more than $600 per month! This was for a $200,000 property. The property owner had a credit score in the high 500's and put nothing down on the loan. The terms of the mortgage and note were: 360 months, 8.5% interest, Loan Amount $200,000, Monthly Payment $1,537.83.

The monthly payment of $1,537.83 covered principal and interest payments. When the PMI of $600+ was added to the monthly payment, the loaded costs were $2,137.83. Once the Taxes and Insurance premiums were added, this person found out much too late that they were doomed to fail before they had even begun.

Ironically, this person was a real estate professional. It is a vivid reminder that everyone does everything "the first time". Not surprisingly the homeowner was foreclosed on by the lender. Shortly afterward she lost her job as a real estate agent.

This is another vivid example of the circumstances that contributed to the mortgage meltdown. The message is very clear. If it doesn't feel right, it probably isn't right. If the numbers don't make sense, the deal doesn't make sense. That is one of the best reasons for a real estate closing not to close.

Finally, the mortgage meltdown experience has damaged a lot of people. Perhaps it is best if we look at what's happened as part of our education in the "School Of Hard Knocks". There are reportedly 169 ways to finance a property. Cash is only one of them. Out of all those possibilities there is sure to be one that is absolutely best for you.

By the way, a properly structured seller or owner-financed contract can save you money by eliminating the need for this very expensive private mortgage insurance.

Is your PMI much larger than you thought? If so what can you do about it?

Keith Donald is a professional in private real estate financing. He consults individuals and small businesses in structuring private paper transactions and turning private paper assets into cash. Mr. Donald is available to assist you with the creation, purchase, and sale of real estate notes. He can be contacted at:

E-mail: http://www.Cash-Now-Seller-Financing.com/contactus.html Web Site: http://www.Cash-Now-Seller-Financing.com

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