(PMI) Private Mortgage Insurance

Low down payment mortgages are somewhat risky for lenders because people are more likely to default on a loan in which they have very little money invested. If a default occurs, the lender must sell the home and pay foreclosure costs out of the proceeds, before applying any money to the loan balance. Lenders often lose money on foreclosures.

Lenders generally require us to purchase private mortgage insurance (PMI) if you are borrowing more than 80 percent of the value of the home you are purchasing (i.e., your down payment is less than 20 percent). PMI guarantees your lender will be paid if you default on your mortgage. PMI does not protect you against losing your house in the event of a default, however. Moreover, the insurance company may be able to seek recourse against you for any default claim they pay to your lender.

How much does PMI cost?

The cost of PMI depends on several factors, such as the amount of your down payment, the type of mortgage you take, and whether you pay premiums on a monthly basis or in a lump sum at closing. PMI premiums can commonly increase your monthly housing cost, but without it, you may be unable to qualify for a mortgage.

Can you cancel your PMI coverage?

PMI protects the lender, not the borrower. Thus, lenders generally want to keep PMI coverage on your loan for as long as possible. Of course, since you pay the premium, you will want to cancel the policy as soon as you are able. Before taking a mortgage, ask your lender about PMI cancellation policies. Some lenders will not allow PMI coverage to terminate during the life of the loan, while others simply require an appraisal showing you have 20 percent equity in the home and a clean payment history. Equity can be built in several ways. Your equity increases when the principal balance on your mortgage decreases, and also when the value of your home increases (because of improvements to the home or fluctuation in market value of homes in your area). If your lender states that your policy can be canceled once you reach a certain equity level, get written confirmation.

Are there any mortgage types which do not require PMI?

Some mortgages (such as FHA loans and VA loans) are insured by the government. Although a low down payment is usually acceptable on these mortgages, PMI may not be required.

Is there any way you can avoid paying PMI?

If you don't have at least 20 percent for a down payment, there may be an alternative to paying PMI premiums. Consider asking if your lender is willing to increase your mortgage interest rate a quarter of a point, rather than require PMI coverage. Your monthly payment will increase by roughly the same amount as the monthly insurance premium. However, mortgage interest is tax-deductible, whereas PMI payments are not.

Title Insurance

In basic terms, title is your right to own, possess, use, control, and dispose of property. When you buy a home, you are actually buying the seller's title to the home. A deed is the written legal evidence that the seller has conveyed his or her ownership rights to you.

Before the closing meeting when the actual transfer of ownership occurs, an attorney or title specialist generally conducts a title examination. The purpose of the title examination is to discover any problems that might prevent you from getting clear title to the home. Generally, title problems can be cleared up before settlement. But in some cases, severe title problems can delay settlement, or even cause you to consider voiding your contract with the seller.

What are some common title problems?

Title problems come in all shapes and sizes. Following are just a few examples of situations that can create a title problem:

• You are buying a house from a single man or woman, but the title search reveals two names on the ownership record and describes them as married.
• The home you are buying was owned by the seller's parents, who intended to use it for their retirement. The seller's father died several years ago, and the mother just recently passed away. A title search reveals that the property is titled in the mother's name, but there is no will on file to indicate how she disposed of it.
• You are buying a house to which an addition was made several years ago. The sellers of the home took out a home improvement loan and did the work themselves. They have repaid the loan, but the lien was mistakenly never removed from the title.
• The seller of the house added central air conditioning several years ago. The seller and the contractor had a dispute over the workmanship, and the seller withheld the final payment on the contract. The contractor filed a mechanic's lien on the property, which has never been removed.
• You are buying a house with a newly paved driveway. The seller of the house bought his neighbor's share of their shared driveway and converted it into a private driveway when the neighbor built a new driveway on the other side of his house. Unfortunately, the expanded driveway doesn't appear in the public records.

As mentioned above, some title problems are easily corrected, while others can be very difficult to resolve. You should insist on being kept informed of every step in the title checking process. If title problems are uncovered, it is important for you to understand your legal rights.

What is title insurance?

Title insurance is the best way to protect yourself against title defects, which may not appear until after you've taken ownership of the property. Before a title insurance policy is issued, a title report is prepared based on a search of the public records. This report gives a description of the property, along with any title defects, liens, or encumbrances discovered in the course of the title search. Title insurance protects you against title defects that were not discovered in the course of the title search (for example, forged signatures). If such a defect is later discovered, your title insurance would cover you.

How does title insurance protect you?

If title problems are severe enough, you could actually lose your house. A title insurance policy protects you and your heirs against title defects for as long as you own the property. The policy represents the title insurance company's responsibility to compensate you for any covered loss caused by a defect in the title, or any lien or encumbrance that was not discovered in the title search. Most title insurance policies do have exceptions, however, so it is important to understand the policy.

What if a lender makes you buy lender's title insurance?

That isn't enough. Most mortgage lenders require you to take out lender's title insurance when you get a mortgage. This type of policy protects the lender's lien on the property, and makes the mortgage more attractive on the secondary market. Coverage on a lender's policy is limited to the amount of the loan, and gradually decreases as the loan is paid off. However, a lender's title insurance policy does not protect your full interest in the property. You should consider purchasing a separate owner's policy to protect your interest in case of title defects.
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