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Mortgage Refinancing > Private Mortgage Refinancing Insurance Carriers Issue Warning
Private Mortgage Refinancing Insurance Carriers Issue Warning |
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It is the natural instinct of human beings to look for ways to save money, and people who have resorted to mortgage refinancing or those homeowners who have secured low interest rates on original purchases during the recent past are no exception. Many lenders are willing participants in helping them to achieve this objective. However, many homeowners are not aware of some of the provisions of their mortgage refinancing that could either help them in saving money or could cost them more in the days to come. If you have put down less than 20% on the mortgage refinancing, there is a possibility of financial adjustment with private mortgage refinancing insurance (PMI), which is paid by the borrower but actually protects the lender in case the new homeowner or refinance customer defaults on the loan. The PMI, with the exception of some high-risk loan packages, must be automatically terminated when the homeowner has paid 22% equity based on the original property value, as per the provisions of the Homeowners Protection Act of 1998, for mortgage refinancing signed after July 29, 1999. Most homeowners are not aware of this provision and are seldom told at closing about it. For example, on a $150,000 loan with a PMI of $50 a month and 10% down, the homeowner could save $600 a year and thousands more dollars during the life of the loan by not having a PMI. Most homeowners keep paying insurance for the lender when they are no longer legally required to do so, being unaware of the fact that federal law does not require the lender to notify the borrower when the equity requirement has been met or cancel the insurance when the requirements of the contract are achieved. Some mortgage refinancing holders and loan originators have come out with split loan structures, commonly referred to as second trust or piggyback loans to ward off any questions and PMI cancellations. The most common form of a piggyback loan, which is a combination of two loans that close at the same time on the home purchase, is for 80% of the home to be financed through the remaining 20%, which represents 10% down payment and 10% piggyback loan. The borrower is misled into this product by being told that it is a way to avoid having to carry PMI and allows for a smaller down payment. However, what the borrower does not realize is that unlike the PMI, the Homeowners Protection Act does not help those wanting to get out from under this added expense because a piggyback is not cancelable. Jeff Lubar, communications director for the mortgage refinancing Insurance Cos. of America, warns consumers that the 80-10-10 loan commonly sold to customers is not the better financial option it is represented to be by some mortgage refinancing holders and brokers. He explained that PMI's are applied to loans secured with as little as 3% down payment and even 0% down for qualifying borrowers, whereas this piggyback product is sold as requiting only 10% down. Moreover, it takes longer to build equity with a piggyback than with a PMI arrangement. Consumers should know that mortgage refinancing is not free as there is a cost involved to eliminate that second loan. Because of the higher debt load that they are carrying, it is also harder for homeowners to tap their equity for home improvements. Whereas PMI is applied to mortgage refinancing with a fixed cost, piggybacks are built with an adjustable rate mortgage refinancing that increases along with interest rates. Moreover, mortgage refinancing can be called in by the piggyback originators anywhere from five to 15 years from origination resulting in balloon payments that most homeowners cannot afford without mortgage refinancing on less favorable terms than those originally established. LendingTree, which offers second trust loans, extols its benefits to people who have little cash for down payments and it also says that: As with every financial option, there are pros and cons associated with piggyback loans and PMI. You should choose the option that suits you the most depending on your financial situation and your state's rules. |
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