Section 184 Private Mortgage Insurance for Native American Home Loans

Private Mortgage Insurance

Parting with your hard-earned money is difficult, so it’s smart to learn the benefits of taking out a private mortgage insurance (PMI) policy when you get a mortgage for your new home. Generally, purchasing a new home means that you have to save up money for several years to have enough for the required down payment, which is usually 20% of the home’s purchase price. A typical single-family dwelling now sells for at least $200,000, which means your out-of-pocket expense would be $40,000. That’s a lot of savings for the average family income.

With private mortgage insurance, you don’t have to wait until you have all that money saved. A primary benefit of having such an insurance policy is to reduce the amount of your down payment. This is available only on conventional loan products.

What is Private Mortgage Insurance

Private mortgage insurance is an insurance policy that you take out to assure a lender that they will receive their money back should you default on the loan. Because you’re not putting down the standard 20% deemed by Fannie Mae and Freddie Mac, PMI serves to protect the lender.

This is not the same as having life insurance on the mortgage, and you will not receive any financial gain from the insurance if you are disabled or should you die; the insurance will not pay off the home loan for you in either of these cases. It is simply to protect the lender for offering you the opportunity to make a smaller, more accessible down payment.

The Advantages of Having Private Mortgage Insurance for The Borrower

With a private mortgage insurance policy, you pay a lesser percentage amount for your down payment. The minimum down payment is 5% with PMI. This insurance is required if you borrow more than 80% of the total purchase price of a home or if you are over 80% loan-to-value (LTV) on a refinance.

For example, on a home that costs $200,000, with a 5% down payment, you would only have to come up with a $10,000 down payment plus costs. This is a difference of $30,000 under the normal circumstances of 20% down.

Another advantage of having private mortgage insurance is that once your unpaid balance goes below 80% (typically 78%) of the total purchase price, you can cancel the insurance, alleviating the necessity of paying the premiums. Some insurance companies do this automatically, but you should watch out for it as well by requesting that your lender cancel the policy when you have repaid 20% of the mortgage amount.

Determining whether it’s time to cancel the policy depends solely on the unpaid balance of your 184 home loan. If you have made improvements to your home and the value has increased, the increase has nothing to do with canceling the policy. No appraiser will come to inspect your home. Just keep in mind that the decrease will not happen overnight.

Considering the mortgage’s interest charges, it could take 10 or 15 years before you have 20% of the mortgage repaid if you consistently only pay the minimum monthly due and never pay toward your principal balance.

Private Mortgage Insurance Tip

Keep track of your payments on the principal of the mortgage. When you reach the point where the loan-to-value ratio hits 80%, notify the lender that it is time to discontinue the PMI premiums.

Federal law requires lenders to tell the buyer at closing how many years and months it will take for them to reach that 80% level and cancel PMI. Lenders must automatically cancel PMI when the balance hits 78%; however, take action and call your lender to be sure this step is made.

Is PMI right for you? As always, please contact a Bank of England Mortgage loan officer to discuss the conventional loan options as well as any other loan program options to see which program fits your specific HUD 184 loan the best.

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