PMI Explained

PMI, or Private Mortgage Insurance, has been around for a while. But it used to be reserved for people with less-than-stellar credit ratings. In its early days, PMI was a mark of shame of sorts, the scarlet letter that home buyers carried with them and averted their eyes when discussing the topic.


WHO HAS PMI?

In recent years, PMI has become the norm rather than the exception. According to the National Association of Realtors's 2006 Profile of Home Buyers and Sellers, the typical first-time purchaser bought with just 2 percent down while replacement home purchasers bought with 16 percent down. While PMI is often associated with first-time buyers, the reality is that even home buyers who are 'trading up' into a larger or more expensive home are carrying PMI.


WHAT IS PMI?

As the term PMI gets bandied about with ever-increasing frequency, many potential home buyers might not feel comfortable asking about the particulars. Simply put, PMI is insurance for the lender, usually paid for by the home buyer, when the buyer has less than 20% equity in the home at the time of purchase.

So if you have one of those creative 80-20 loans, you've got PMI. If you did anything other than a conventional 20% or more down payment, you've most likely got PMI. Some home buyers sidestepped PMI, but the trade-off was to pay a higher interest rate.


HOW DO I GET RID OF PMI?

PMI used to be incredibly difficult to do away with. Borrowers were responsible for keeping track of their loan ratio, and then had to contact their lenders to have PMI removed. Buyers who did not keep track of the numbers continued to pay into PMI, even when they surpassed the investment requirement that would release them from the additional payment.

Loans secured after July 29, 1999 have added protection with automatic cancellation or termination of the PMI once the balance is below 80 percent of the original value. This is known as "Automatic Termination", and typically kicks in when you accrue 22% equity.

But your lender is certainly not keeping track of your home's natural appreciation. So if you are in an area that has seen strong appreciation over the past few years, or even if you have made improvements to your home, you might already be at or beyond the necessary threshold to cancel PMI.

David Porter points out that, in the case of "Borrower Requested Cancellation", home owners should be aware of the following restrictions:

May be requested once you pay down your mortgage to the point that it equals 80% of the original purchase price or appraised value of your home at the time loan was obtained, which ever is less.
No 30 day late payments on your mortgage in the last year.
No 60 day late payments on your mortgage in the last two years.
Your mortgage servicer may require an appraisal to evidence the current value.
Having a second mortgage will likely foul up your request.


PMI MYTH: My real estate taxes will increase if I have my home reappraised.

Many people wonder if having their lender reappraise their homes will trigger an increase in property taxes. The fact is, the A mortgage lender's professional appraisal of your home has absolutely nothing to do with your property tax assessment....Only the local tax assessor -- not a licensed appraiser hired by your mortgage lender -- can reassess your property.


As more and more people are faced with increased mortgage payments from adjustable rate mortgages, getting rid of PMI could prove to be an incredibly helpful tool for home owners.

A Common Myth of Home Buying

Piggybacking off of my last post, Hiring Real Estate Agents, What's Your Method of Choice? I'd like to address a common misconception among home buyers.

Every couple of months, it seems, I have to talk a friend or family member out of doing this, so I thought I'd share this common myth with the rest of the world.

Home buyers often convince themselves that they will save money by choosing one of two options. They believe that if they A) represent themselves, or B) work with the selling agent, they will somehow save themselves 3% of the commission.

Here is the honest-to-God truth, from someone who does NOT work in the real estate industry: Nothing could be further from the truth.

The reality is, commission is set by a contract between the home seller and the agent whom the seller chooses to represent the home. The selling agent, then, determines how much of that they are willing to share with the "other side", the buyer's agent.

If the agreed-upon commission is, say 6%, a selling agent could very well choose to offer only 1% to the buyers' side. This is unlikely, as few buying agents would leap at the chance to sell a home for 1%. Conversely, if the agent needs add extra incentive to sell the home quickly, they could choose to offer 5% to the buyers' side. During the time I was involved in real estate marketing, I did see several 4% offers to the buyer's side in return for quick sales.

If there is no buying agent, the selling agent keeps the 6% commission to themselves, since that is the contract they have with the seller. A home buyer does not play a role in the contract between seller and seller's agent. And, again, that is where commission is set.

Home buyers are often convinced that a selling agent will reduce their side of the commission of there is no buyer's agent. This is highly unlikely. When it does happen, let me tell you why you should be extremely wary of these folks:

1. You are not adequately represented in the largest financial contract most of us will ever be involved with in our lifetimes. If you choose to allow the seller's agent to have "dual agency", where one agent represents both sides, how good of a deal do you think you're getting in contract negotiations? Particularly if the agent has agreed to do twice the work for half the pay, per your insistence?

2. An ethical agent who will reduce commission and allow you to represent yourself will wind up representing you anyway. Only rookie agents will make this mistake. And a rookie agent will have a hell of a time navigating the complex waters of implied dual agency.

An unethical agent will take advantage of you to the fullest, since he or she will have to explain each step of the process to you, thus creating a lot more work.

No matter how you feel about real estate agents (and I'll state right here that I've got plenty of mixed feelings myself), you need to be represented when you purchase a home.

I'm flummoxed when I hear otherwise rational human beings, people who realize that after a certain age you just hire professionals to do things, suddenly decide to forego a buyer's agent.

Unless you're willing to pick up another full-time job, you're saving yourself nothing. By that I mean that you must be prepared to see homes, navigate inspections, negotiate contracts, etc. and do it well enough to protect what is likely the largest investment in your 'portfolio'.

If you don't do it well enough, you can find yourself in a home in need of serious repairs, in a contract that exposes you to a world of liability, or any number of worst-case scenarios.

I don't know too many people who would drive without car insurance, no matter what the expense. Because the reality is that, if something goes wrong, it goes very wrong. And no amount of money saved compensates for that.

I hope this posting will clear up a widespread myth about home buying. I know a lot of people will be irritated to read this, but I hope that ultimately most people find it helpful.

Refuting "Facts" at RealtyTimes.com

It looks like we get to kick things off with a piece that proves the need for our website's very existence.

The well respected site Realtytimes.com posted an interesting article on its homepage today. Interesting, because if you try to follow the advice within, you'll wind up committing tax fraud.

Today, Diane Kennedy writes about the generous $250,000/$500,000 capital gains exclusion that homeowners can take on the sale of their homes. But in her second paragraph, she makes this assertion:

"The IRS allows you to have temporary absences from your home each year that can be up to 11.5 months! You can literally buy a home, live in it for 2-3 weeks per year for two years and take the entire tax-free gain exclusion."

My first reaction to reading this was "That's just wrong!" But, always one to admit that things change, and I could indeed be incorrect, I decided to research the facts before sharing them. I went to the IRS website, which helpfully reinforced what I thought I already knew.

Just to clarify, yes, you are entitled to take a $250,000 capital gains exclusion ($500,000 on joint returns) on the sale of your home. But, like everything else in life, it's not quite as simple as that. Straight from the IRS, here are the requirements you'll need to meet in order to keep from paying taxes on the first $250,000/$500,000 profit on your home's sale:

"To be eligible for an exclusion, your home must have been owned by you and used as your main home for a period of at least two years out of the five years prior to its sale or exchange. The required two years of ownership and use during the five–year period ending on the date of sale do not have to be continuous. You can meet the ownership and the use tests during different two year periods. However, both tests must be met during the five–year period ending on the date of the sale or exchange."

In other words, yes, the IRS does take into account that you may have more than one residence and is, for once, lenient in its application of "primary residence." But you must have lived in the home for a total of two years out of the previous five. Applying Ms. Kennedy's advice, that you could live in a home for a couple of weeks and take the exclusion after two years, will almost certainly get you audited.

There are exceptions to this two-out-of-five rule. "Unforseen circumstances" such as a health crisis, change of employment, or military duty. To explore those exceptions further, read the IRS's publication "Topic 523" for more information.

In the meantime, we've alerted Realty Times to their error, and will wait to see a correction posted.