Private Mortgage Insurance

Private mortgage insurance (PMI) is extra insurance a lender may require you to buy if you’re forking over less than 20% of a property’s value as a down payment, because people who put down small amounts are more likely to default on a loan. If you opt for mortgage insurance, once you’ve got 20% equity in your home, you should be able to cancel the insurance. (Though an appraisal may be required beforehand.)

An important thing to understand about PMI is that the 20% equity threshold relates to your home’s value, not necessarily 20% of the mortgage amount. If you get a great deal and buy your home below market value, buy a fixer-upper and fix it up to increase its value, or pick a locale that suddenly becomes popular and rapidly appreciates in value, your mortgage amount might be very different from the value of your house. If you are required to pay for PMI, keep tabs on the changing value of your home.

Last time we ran this article, we heard from a reader named Octavian, who had this to say:

You … failed to mention a way to avoid PMI even if paying less than 20% down. When we bought our house, we only had 10%. Our mortgage broker advised us to open two mortgages, one for 80% and the second for 10%. The second mortgage rate was higher, nonetheless we ended up paying less than if paying PMI, with the interest paid being tax deductible. This kind of arrangement seems to be called 80-10-10…. To your credit, there are many mortgage brokers who either are not aware of this approach or otherwise do not advertise it. I do not know why, since it worked beautifully for us. We refinanced last year with no penalty (rolling two mortgages into one).

You’ll find more home-buying tips in our Buying a Home area, where you can learn about reduucing your mortgage costs and even check out interest rates.

And if you’re in the market for a mortgage, another way to inform yourself about options is to spend some time at the websites of lenders. Here are some of the biggies:

Capital OneWachoviaCountrywide FinancialNational CityBank of New YorkWells Fargo

By Motley Fool Staff

This entry was posted on Friday, October 27th, 2006 and is filed under Home Mortgages. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
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How Credit Scores Affect Mortgage Applications

With a good credit score an applicant will receive prompt response from many lenders, all of them offering low interest rates and low down payment options. The loan amount offered also may be high. On the contrary a low credit score would result in a lot of rejection from various mortgage financers. Because creditors wouldn’t come forward easily to give credit to individuals that have a history of difficulty in repaying existing loans. After all, creditors take risk when they finance mortgages against the credit history of a debtor. Naturally, they will wish to remain on the safe side and pick up less risky ones that have good credit histories. A good credit score means less chance of missing on payments and therefore less risky.

But there are some real risk takers that will come forward to finance mortgages for individuals with bad credit scores. They would charge high down payments and always high interest rates though. They may also fix additional charges for every little paper work and may charge high closing rates. The loan amount offered will also be considerably less. The individual with poor credit scores will not have much choice but to accept the terms and conditions as there are no other alternatives. This is a tight situation and to avoid this you must have a good credit score.

People with bad credit may fall in to the trap of ’secured loans’. Secured loans are the ones where the loan applicant offers an asset as collateral security. The lender becomes secure about the repayment of the loan and not the borrower. Securing a loan with bad credit score becomes easy only when the applicant is willing to offer some asset as collateral security. This again is a very dangerous situation where an individual runs the risk of losing his entire collateral asset in case of failing to pay the loan installments in time. An individual should always avoid such type of a loan.

Resort properties normally require large amounts of finance which a person with bad credit may find it difficult to obtain. So it is always advisable to keep your credit score high. Incase the credit score becomes low due to unavoidable financial reasons it can be improved upon. There is no need to lose hope simply because a person has a low credit score. If the property that he intends to buy has good equity he should go out and try to obtain finances for it. There are many sub prime lenders willing to offer their services.

For a review of your credit report as it relates to a mortgage loan and a consultation on the best loans available to you, give us a confidential, no obligation and no cost call.