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Many a first-time homebuyer has grumbled about paying private mortgage insurance. This article discusses the particulars of private mortgage insurance, also known as “PMI.”

Private Mortgage Insurance

Unless they owners are insane, every business in the United States carries some form of insurance to protect against losses. The various lending institutions that issue home loans, equity lines and refinances to borrowers are no different. The insurance they carry is private mortgage insurance.

Private mortgage insurance protects a lending institution from losses if you default on your loan and a home goes into foreclosure. Essentially, the lending institution is going to be covered for any shortages between the cost of liquidating the home and the amount of the loan. This is of particular importance to a lender when the housing market pulls back from high valuations. In such a pull back, it is not uncommon to see the total mortgage balance exceed the value of the home. Obviously, this makes lenders uncomfortable.

PMI – Premiums

Most homeowners can wrap their minds around the need for private mortgage insurance. The grumbling starts, however, when they find out who has to pay for the insurance. Yep, the homeowner is on the hook. As the homeowner, you are paying for insurance that will protect the lender if you default. While this may not seem fair, keep in mind the lender is giving you a rather sizable chunk of money. If you are still grumbling, there is a way to avoid paying mortgage insurance.

20 Percent Down

If you take out a home loan, the 20 percent figure will come front and center in your mind. Why? 20 percent is a magic figure in the world of home loans and mortgages. If you make a down payment of 20 percent, you are not required to obtain or pay for private mortgage insurance. With PMI premiums running $1,000 or more a year, it makes sense to pay 20 percent as a down payment if at all possible.

What if you can’t scrape together 20 percent of the home value for the down payment? Well, you’re stuck paying PMI, but not forever. Once your equity in the home reaches 20 percent of the valuation, you can cancel the PMI. Keep a close on your equity as lending institutions are under no duty to tell you when the magic 20 percent figure is reached. Oddly, they almost never seem to remember!

PMI

Private mortgage insurance is expensive, but you can avoid it with a sizeable deposit. If you can’t come up with that chunk of change, try to keep in mind the beautiful home and investment the loan let you acquire.

In previous decades people with high risk mortgage loans often left financial companies holding the keys when rates started to go up.

But according to a recent study by First American Real Estate Solutions, even if rates do start to climb this year, the number of defaults this time around is not likely to go much higher than $110 billion.

The study estimated 1.4 million of 7.7 million adjustable rate mortgages sold in 2004 and 2005 would be at risk of default. But even if that many households were to default, the financial fallout would be limited.

The reason: the US economy is so strong this time around, and so diversified that this amount represents only about one percent of total national homeowners’ equity, and it would be spread out over two or three years. So the economy would be more than able to absorb the losses.

**Factors driving continued Real Estate boom

While many real estate experts predict a slight slowdown in real estate and mortgage activity during 2006, most also see steady gains, with continued economic growth and well-balanced supply/demand ratio in the housing market.

Some of the factors driving the real estate market:

+ Continued low interest rates – Although rates climbed slightly in 2005, they are still at historic lows. Homes that were purchased over the last few years with interest-only and adjustable-rate mortgages will enter the refinancing market. Homeowners will refinance to take advantage of increased equity values, and to convert to fixed-rate mortgages as rates start to climb.

+ Internet Effect – The internet gives buyers the opportunity to search MLS listings without going through an agent or broker. Not only have consumers become better informed and better educated about opportunities, but the entire home-buying process now takes less time than just four or five years ago. This trend will continue to accelerate.

+ Healthy economy leads to more relocation – A vibrant economy and strong residential real estate activity drives commercial activity as well. And that usually leads to corporate relocations as people follow business and employment opportunities. That means increased real estate activity.

+ Generation X effect – As baby boomers begin retiring and moving out of the real estate buy and sell cycle, Generation Xers have taken their place with a vengeance. The incomes of Gen Xers are generally higher than the previous generation, and financing is easier to get, so they have been able to buy more expensive homes sooner than boomers did. Gen Xers now make up 47% of the total homeownership segment in the U.S., and have an especially large impact on downtown and suburban communities.

**Many UK mortgages not covered by life insurance

A recent report by Sainsbury’s Bank estimates that as many as 4.2 million people in the UK have mortgages that are not covered by life insurance. That means that as much as GBP217 billion worth of mortgages are open to be passed on to loved ones. This number has grown significantly over the last few years as the number of new mortgage approvals has grown.

Of course inheriting the debt associated with a property would be accompanied by ownership of the property itself. And with current prices on the rise, most people, even if forced to sell a property because they could not pay the mortgage, would not be as badly off as the report might suggest.

**UK borrowers opt for 2 year fixed mortgages

According to a recent survey of mortgage purchases in the UK, there was a significant shift in January towards 2 year fixed mortgages. In January 39 percent of borrowers chose this option compared to 27 per cent in December.

Interestingly enough, only 9 percent of buyers opted for a longer term fixed mortgage in January, compared to 16 percent in December. This was in spite of longer term mortgages (up to 10 years fixed rate) at less than 5 percent.

The popularity of a 2 year fixed mortgages suggests that buyers assume rates have bottomed out, at least in the medium term, but are not convinced they may not go down further two or three years from now.