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Insurance
FAQ
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Private Mortgage Insurance
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Private
Mortgage Insurance (PMI) protects lenders
against loss due to foreclosure. Most lenders
require PMI when the down payment is less
than 20 percent. The PMI premiums are
paid by the borrower and the policies are
provided by private mortgage insurance companies.
PMI is NOT mortgage life insurance. PMI protects
the lender against loss. Mortgage life insurance
protects your home and family by paying all
or a portion of your mortgage in the event
of your death.
Methods of
paying for PMI have changed over the years.
Prior to 1994, borrowers paid twelve to
fifteen months' premiums at close of escrow.
In 1994, borrowers could pay as few as two
months' premiums at closing, and then pay
a monthly premium with each mortgage payment.
In 1998, a borrower could finance a single
lump-sum mortgage insurance premium as part
of the loan amount. In 1999, private mortgage
insurance companies began borrowing Fannie
Mae's new "Lowest-Cost MI" program. The
new program allows borrowers to finance
or pay up front a portion of premiums and,
in return, receive a lower monthly premium
rate. With each new strategy, home ownership
has become more affordable for more people.
How much
does PMI cost? The cost of PMI depends
on the percentage of the down payment and
the type of loan. Here are some sample PMI
charges. These are guidelines only. Payment
factors are subject to change. Please contact
your lender or broker to get the cost of
PMI on your loan.
| LTV |
30
year fixed |
15
year fixed |
30
year adjustable |
| 95% |
0.78% |
0.72% |
0.92% |
| 90% |
0.52% |
0.46% |
0.65% |
| 85% |
0.32% |
0.26% |
0.37% |
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Example:
If you are getting a 30 year fixed loan,
and are putting 10 percent down, the
PMI premium is 0.52 percent. If your loan
amount is $100,000, your PMI payment will
be $100,000 x (.52/100)x 1/12 = $43.33 per
month.
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| Avoiding
PMI |
The
easiest way to avoid PMI is to make a cash
down payment of 20 percent or more. Potential
sources of additional cash include:
- Borrowing
against your 401(k) retirement plan
- Taking
a margin loan against your stock
- Asking
relatives for a gift
- Refinancing
your car and taking cash out
- Selling
your car, jewelry, etc.
In the event
you are unable to make a 20 percent
cash down payment, consider these options:
- Piggy
Back Loan:
- A piggy
back loan usually allows you to avoid
PMI even though you are making a down
payment of less than 20 percent.
The most common piggy back loan combinations
are:
- 80-10-10:
Eighty percent first loan, 10
percent second (piggy back) loan, 10
percent cash down payment.
- 80-15-5:
Eighty percent first loan, 15
percent second loan, 5 percent
cash down payment.
- 80-20:
Eighty percent first loan, 20
percent second loan, no cash down
payment.
Even though the second loan rate may be
higher than the first loan rate, you usually
come out ahead since you don't have to
pay PMI. Also, the interest on the second
mortgage will likely be fully tax-deductible.
- Lender
Paid PMI (LPMI):
- In this
case, the lender makes your PMI payment
for you, but charges you a higher rate
on the loan. Since the PMI payment is
not tax deductible, and the higher rate
results in a higher, tax-deductible interest
payment, in the short-run you may save
money by choosing LPMI over the conventional
PMI option. The disadvantage is you're
stuck with the higher interest rate for
the life of the loan. If you had paid
PMI, you could cancel it when you achieved 20
percent equity in your property.
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| Canceling
PMI |
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The
Federal Government passed a private mortgage
insurance (PMI) reform law, effective July
29, 1999. Known as the Homeowners Protection
Act of 1997, the new law amends the Federal
Truth in Lending Act and could save some homeowners
more than $1,000 a year in PMI payments.
The key
provision in the new law forces most lenders
to automatically cancel PMI when a homeowner
pays down their mortgage balance to at least 78
percent of the home's original purchase
price. Home owners also may apply to have
the insurance removed when the mortgage
balance drops to 80 percent of the
original value. The appraised value may
be determined by the original, or a
new appraisal. Both provisions require that
the borrower be current with their mortgage
payments.
PMI reform
not for all:
Only loans
written July 29, 1999 or later are covered
by the new law, and the small print in many
other mortgages could preclude still more
consumers from canceling PMI.
If you have
questions about PMI cancellation policies,
contact your mortgage company.
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| Homeowners
Insurance |
Homeowners
insurance is required by the lender to
obtain a mortgage. The typical homeowners
policy has two main sections: Section I covers
the property of the insured and Section II
provides personal liability coverage to the
insured. It's a good idea to insure your home
for the total amount it would cost to rebuild
it if it were destroyed. There are three ways
to insure your home:
- Replacement
Cost: Under this coverage, the policy
owner is reimbursed an amount necessary
to replace the structure with one of similar
type and quality at current prices, subject
to a maximum dollar amount.
- Guaranteed
Replacement Cost: Under this coverage,
the policy owner is reimbursed an amount
necessary to replace the structure without
a deduction for depreciation and without
a dollar limit.
- Actual
Cash Value: Under this coverage,
the policy owner is entitled to the depreciated
value of the damaged property.
To determine
the cost to rebuild your home, consult with
an appraiser or a local builder. Note: You
only need to insure the structure. You do
not need to insure the land.
In the
event of a serious loss -- a fire,
for example -- how would I fare?
In most
cases you should insure your dwelling and
its contents for their replacement values,
which will likely differ from the dwelling's
market value and your personal property's
depreciated cash value. Also consider getting
a policy with automatic inflation adjustments
so that the replacement cost keeps pace
with the general level of price increases.
Standard
coverage insures your possessions at 50
percent of the value of your dwelling. Many
people boost this coverage to 75 percent
with additional protection. There are individual
limits on certain types of personal property
(see below).
Free-standing
structures on your property (garages, gazebos,
tool sheds, etc.) are also covered, with
standard protection equal to 10 percent
of your dwelling. Trees and shrubbery normally
can be replaced up to a limit of 5
percent of your dwelling coverage. As is
the case with your personal property, you
should assess your needs to determine if
you want to pay extra amounts to increase
these levels of protection.
Also, pay
attention to what might happen if you were
to lose the use of your home for an extended
period. Loss-of-use provisions are important
elements of homeowners policies, and coverage
levels up to and exceeding 30 percent
of your dwelling's insurance aren't unusual.
If someone
not covered on my health insurance were
to suffer a serious injury in my home, and
I were found liable, how would I fare?
The standard
level of liability protection in homeowners
policies has been $100,000, but it's rising
all the time. Today, $300,000 is not an
uncommon amount, and even higher levels
are recommended for affluent homeowners
with substantial assets to protect.
In this situation, "umbrella" policies have
become popular. These policies provide excess
liability coverage on both your homeowners
and automobile policies, and are relatively
inexpensive (you normally need to carry
both underlying policies with the same insurer).
Can I
afford a high deductible--say $1,000--to
save money on the?
The differences
in annual premiums between policies with deductibles
of $250 (you pay the first $250 of damage,
the insurer pays the rest), $500 and $1,000
may easily be worth twenty to 30 percent
of the annual premium. So, if you can afford
the expenditure, and want to place a small
bet that you won't face a home-related loss,
consider a larger deductible. |
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| Title
Insurance |
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As
a buyer of real estate, you want the assurance
that the property you are buying will belong
to you and be marketable--that there are no
hidden interests in the property which will
interfere with its use and ultimate disposition.
The written,
public record of ownership of a particular
piece of real property is critically important,
but not sufficient in determining its ownership.
In investigating the ownership of a parcel
of property, one could trace the "paper
chain of title" back to the original conveyance
from the government. The chain of title,
however, wouldn't readily reveal incomplete
or erroneous shortcomings--forgery, or the
mental incompetence of a grantor, for example.
Title insurance was developed to help provide
compensation for certain faulty guarantees
and to assure marketable title.
How does
title insurance differ from other types
of insurance?
Title insurance is different from other
types of insurance in that it protects you,
the insured, from a loss that may occur
from matters or faults from the past. Other
types of insurance such as auto, life or
health cover you against losses that may
occur in the future. Title insurance does
not protect against any future faults. Another
difference is that you pay a one-time premium.
A title insurance policy will protect you
from risks or undiscovered interests. Once
purchased, title insurance remains in effect
for as long as you own your property.
Standard
Policy
The standard policy of title insurance protects
real property owners against items on- and
off-record. Off-record risks include forgery,
lack of capacity to enter into a transaction
(incompetence or improper authority), impersonation,
failure to properly deliver the deed, etc.
The policy holder is NOT protected against
title defects known to the policy holder
on the date of issuance of the policy.
American
Land Association Policy (ALTA for lenders).
This policy was developed to provide additional
coverage to lenders who could not physically
inspect the property without incurring great
expense. It includes the risks associated
with the rights of parties in physical possession,
patent reservations, recorded notices of
zoning enforcement, and unmarketable title.
Extended
coverage (ALTA Owner's Policy)
This is a policy that gives buyers or owners
the same protection that the ALTA policy
gives to lenders.
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