Two mortgages, private insurance options that lead to home ownership

The dream is often, after years of living with parents or in apartments, to own a home. With garden, garage, a lawn and all the joys of maintenance. But reality can be cruel.

The biggest barrier to buying has been, for many years, the requirement for a 20 percent down payment. This has become increasingly difficult to amass as housing prices have soared, while wages have lagged.

Research had shown that those who put less than 20 percent down are far more likely to default on the loan, causing losses to lenders. Foreclosure can be expensive and time-consuming, which is why lenders want to avoid it.

Several years ago the mortgage industry came up with a way to bring more families into home ownership by ending the 20 percent requirement. The idea was called private mortgage insurance. It works like this: The borrower puts down as little as 2 percent (or even less at times) if a policy is taken out along with the loan. This protects the lender from default on the loan. But it doesn't actually insure anything for the borrower; it just allows for a lower down payment.

The cost of the policy is based on the size of the loan and paid for along with the monthly mortgage payment, usually bundled as one lump sum. Average cost for such policies is about $1,500 a year for a loan of around $200,000. Home buyers pay this premium until they have 20 percent equity in the home. At that time the policy would be canceled and the mortgage payment would decrease.

A recent Chicago Title and Trust study notes that first-time home buyers spent three years saving for a down payment before buying. And when they finally did buy, the average down payment was 13.7 percent. Had they gone without private mortgage insurance and saved for the requisite 20 percent down payment, these first-timers would have been renting for a minimum of four-and-a-half more years. On the flipside, had they been willing to put only 5 percent down, they could have realized their ownership dream in just more than a year.

One way to help financially handicapped home buyers is to apply for a first and second mortgage.

"I try to do that with my customers to avoid PMI," said Megan Thompson, home mortgage consultant for Wells Fargo Home Mortgage. "I suggest that if they have a good credit standing they apply for an 80 percent and a 20 percent mortgage. That way they meet the 20 percent down payment stipulation."

Many Realtors credited mortgage insurance with the long housing boom, which is only now showing signs of tapering off. Private mortgage insurance brought many more families, previously unable to raise the 20 percent, into the market. The government reports that in 1994 nearly one of every two home buyers obtained a low down-payment loan; many of them using private mortgage insurance.

"PMI has helped a lot of younger people get into the housing market, but it costs them a lot of money. An 80-20 mortgage is a better way to go," said Nevada Appeal real estate columnist Gayle Farley.

Unfortunately, some people continue to confuse PMI with mortgage life insurance. Private mortgage insurance puts people in homes; mortgage life insurance pays all or a portion of your mortgage in the event of your death.

• Contact Sam Bauman at sbauman@nevadaappeal.com or 881-1236.

Why try PMI?

By going with PMI first-timers increased their buying power. For example, $5,000 is equal to a 10 percent down payment on a $50,000 home; but it is also sufficient for a 5 percent down payment on a $100,000 home. Another scenario: $10,000 may constitute a 20 percent down payment on a $50,000 home; but it can also provide enough financial leverage to help qualifying borrowers buy a $200,000 home with only 5 percent down.

That is the value of PMI - it is the reason so many young families today can afford a home despite earning and saving relatively less than their parents.

What it means to you

Here's how homeowners can look into private mortgage insurance as it applies to them.

• First, check your mortgage statements to see how far the mortgage has been reduced. If the 20 percent equity has been achieved, the lender should have already canceled the policy under fair housing laws. If the PMI is still in place, contact the lender and ask to have it removed.

• If the 20 percent goal has not been achieved, there is an alternate way to end PMI. If the loan is three or more years old, chances are that the property has increased in value until the outstanding loan is less than 80 percent of the currently appraised value of the house.

A recent example of the increased value method went this way:

• First, a talk with the lender to make sure that the property would qualify under increased value. There may be restrictions, such as Veterans Administration and FHA loans. If the lender advises that there are no snags, move to the next step.

• Check sales of nearby property to see how home sales are doing in the neighborhood. If prices indicate that similar homes appreciated enough to make your stage 20 percent of the loan, move on.

• Ask for either a regular appraisal (usually around $300) or a broker's estimate (usually around $150). The property will be inspected in either case and a report made to the lender.

• The lender will check to make sure all aspects of the loan are up to date and there is a three-year history of regular payments and that all escrow funds are up to date.

• Sit back and wait. It took about three weeks from original application to delete PMI before the policy was canceled and the monthly payment reduced.