REThink Real Estate
(Ostensibly, the FHA doesn't want to rely on your word that you'll always pay the MIP annually -- since it is a requirement, FHA will qualify you on the basis of a monthly MIP payment).
Frankly, the better financial decision would be to keep your lump sum of cash in the bank and earn interest on it, just doling out the monthly installment toward PMI as it comes due.
If you're getting a conventional loan, though, you do have a number of alternatives for eliminating PMI.
First, you might be able to take a home equity line of credit to boost your down payment up to 20 percent, and avoid having PMI entirely.
Second, you can explore the option of something called "single premium mortgage insurance," a 1-2 percent one-time payment you make at closing that pays for your mortgage insurance upfront in one single lump sum, on top of your other closing costs.
Both of these modes of avoiding MI in your monthly payment may help buyers who are struggling to qualify for the purchase price target because the mortgage insurance cost is pushing their mortgage payments beyond what loan guidelines say they can actually afford.
Third, there are loan programs that allow for LPMI (lender-paid mortgage insurance) wherein you pay a higher mortgage interest rate for the life of the loan, and your lender pays the entire mortgage insurance premium (your mortgage interest is fully tax deductible, remember). Alternatively, you can take a traditional buyer-paid mortgage insurance-backed loan, and simply elect to pay your yearly PMI premium on an annual, lump-sum basis, at the beginning of every year.
Both these payment methods prevent the PMI premium from being added into your monthly mortgage payment, but they do little or nothing to help you afford a higher-priced home than simply paying a regular PMI monthly installment.
One thing: Some homeowners have the concern that paying PMI upfront or annually would result in a forfeiture of funds if your home's equity hits the 78 to 80 percent mark after payment has been made. The Homeowners Protection Act of 1998 expressly provides that "if the borrower has paid for private mortgage insurance in advance at closing or is currently paying on an annual basis, upon cancellation they are entitled to a refund of the unearned premium, which must be transferred by the lender within 45 days of cancellation notification."
That said, there is some danger that once you've paid your premiums upfront or annually, PMI will be both out of sight and out of mind. So, there is some danger that you might not be as aggressive about tracking your home's equity and applying for PMI cancellation if you have prepaid it as you would be if you were having to pay it every month. If you do decide to prepay or annually pay your ongoing PMI premiums, be sure to carefully watch your home's value and your mortgage statements and apply to have your PMI canceled as soon as you think you qualify.
Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.
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