- The Washington Times - Friday, October 6, 2000

Lenders ideally prefer to see a buyer put 20 percent down on a home to minimize their risk, in case the loan defaults and they need to recover their investment through foreclosure. So how do lenders protect themselves when the buyer puts down less? Through private mortgage insurance.

PMI allows buyers to purchase a house with a low down payment, although it adds to the monthly mortgage bill up to about $65 a month for a $100,000 loan. With PMI, buyers can get a home with as little as 3 percent to 5 percent down.

This can be appealing to renters who are looking to buy their first homes or buyers who are struggling to build a large down payment.

"If potential buyers don't have a large down payment and their credit is not so great, they will be required by their lender to purchase PMI. It's a good way to purchase a home with a low down payment," says Dennis Melby, a Realtor with Long & Foster in Bethesda.

But confusion over mortgage insurance still remains. How is PMI different from other types of home insurance? PMI is not mortgage life insurance, which immediately pays a mortgage in the event of the owner's death or disability. PMI is not homeowner's insurance, which protects the buyer from certain types of loss or disaster.

While these types of insurance protect the consumer, PMI covers the lender or investor if the borrower stops making payments.

The insurance premium on a $100,000 loan generally ranges from $25 and $65 a month, depending on the size of the down payment. Buyers typically pay the premium along with their monthly mortgage, but mortgage insurance companies have created an array of options that let buyers purchase homes with a lower down payment.

Buyers can pay a monthly premium tacked onto their mortgage or choose a single-premium plan, which rolls it into the mortgage loan.

The third plan is lender-paid mortgage insurance. Under this option, the lender would pay the insurance premium. In turn, the buyer would pay a higher interest rate to cover the lender's increased cost to loan the money. The lower the down payment, the higher the interest rates tend to run.

From a lender's standpoint, PMI makes sense. Joong Yu, a loan officer with Lincoln Mortgage in Gaithersburg, says lenders working with a buyer who can afford to pay at least 20 percent down know the chances are this person will not default on the loan.

"In many cases, PMI makes it possible for lenders to still do business with people who have a low down payment," Mr. Yu says.

Qualifying for loans covered by PMI is similar to qualifying for a traditional mortgage loan. In any case, good credit is still essential to being approved for a loan.

Maria Mantzouranis, a broker with Professional Mortgage Bankers in Olney, urges buyers with questionable credit to pursue loans through the Federal Housing Administration.

"If buyers can put 20 percent down, they should do that. It's always recommended. If they cannot, and they are having problems with credit history, an excellent way to get approved is to utilize FHA. With as little as 3 percent down, FHA will cover up to as much as $214,000 loans," she said.

With an FHA loan and a low down payment, default mortgage insurance is still required. However, some lenders offer low down-payment options that don't require mortgage insurance. The piggyback loan is the most common. Also referred to as the 80-10-10 loan, under this option, the buyer takes a first mortgage for 80 percent of the purchase price and tacks a higher-rate second mortgage for 10 percent. Then the buyer has to provide a 10 percent down payment and avoids the private mortgage insurance.

Rhonda McGill, a broker with Waterfield Mortgage of Woodbridge, Va., describes the piggyback loan as an intelligent route to take.

"It is a way to avoid PMI, and the total payment is less in the long run. Furthermore, both loans are tax deductible," she says.

So can PMI be canceled? Yes, once the equity in the home reaches 22 percent, then the buyer doesn't need PMI.

"According to a federal law that was passed last year, PMI can usually be canceled when the homeowner builds enough equity," says Tom Horstkamp, a broker with Community Home Mortgage in Beltsville. "But [for] most loans originated after July 20, 1999, [PMI] will terminate once the mortgage is paid down to 78 percent of the original purchase price of the house."

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