When Duncan and Angela Dennis bought their brand-new $207,000 home in the exclusive Brooks Mill subdivision of southwestern De Kalb County in Georgia this past November no one informed the couple that a higher down payment would have eliminated the need to pay private mortgage insurance (P.M.I.). This fee increased their monthly outlay by $124. “We were led to believe we actually needed mortgage insurance,” insists Angela Dennis.
P.M.I. is only required if home owners do not pay a minimum of 20% down at closing. Unlike home owners’ insurance, which is valuable and protects consumers, mortgage insurance mainly benefits the lender, offering it protection against borrowers who may default on loans. However, it enables individuals who can only pay as little as 3% to 5% down to buy homes.
Effective July 29, 1999, the Homeowners Protection Act of 1998 requires that lenders provide written notification to buyers at closing explaining that they have P.M.I. on their loan and can cancel it at a certain point.
Potential home buyers can avoid mortgage insurance altogether by: (1) putting down 20% of their own money; (2) choosing an 80-10-10 loan, which allows you to put 10% down, take out a 10% fixed-rate, second mortgage or equity line, and secure an 80% first mortgage; or (3) choosing the 80-15-5 loan (similar to 80-10-10 loan), putting down 5%. With the latter two options, you will have two mortgages. The benefit is that second mortgages are tax deductible, while P.M.I. is not. In all three scenarios, your monthly house payment will be lower.
Hugh Rowden, a mortgage loan officer for First Union Mortgage Corp. has additional information on his Website http://mortgage.firstunion.com/house/hughrowden or e-mail him at hugh.row firstname.lastname@example.org with any questions.