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PMI, Private Mortgage Insurance, is required on most mortgage loans in which the borrower has less than a 20% equity position.  These insurance companies charge the borrower a premium to benefit the mortgage lender in case of default.  Part of their insurance rate analysis includes an in-depth analysis on the potential for property value decline.  Obviously, a large concern for everyone today.

From The PMI Group, Inc.

Risk scores translate directly into an estimated percentage risk that home prices will be lower in two years. The Summer 2008 Risk Index is based on first-quarter Office of Federal Housing Enterprise Oversight (OFHEO) data.

The Great News, Denver is one of only only 14 areas in the country, with a less than 1% risk of prices dropping in the next two years!

To see the other 13 areas, click here.

As more of our clients are utilizing mortgage insurance, often  referred to as PMI or MIP.  I thought I’d explain how it works.

On conventional loans (Fannie Mae and Freddie Mac), the premium is based upon the down payment in 5% increments and is available either as a monthly premium (which varies between .32 - .78% of the loan amount annually) or a lump-sum premium which can be paid by the buyer, the seller or built into the loan or the interest rate.  Monthly mortgage insurance is tax deductible for borrowers whose income is below $100,000 through 2010 and if the insurance is built into the interest rate or financed back into the loan, it is fully tax deductible for the life of the loan.

Example:  if the the loan amount is $200,000 and the monthly MI premium is .78%, the math would be $200,000 x .0078 = $1,560/12 = $130/month.

With FHA loans, the borrower pays both an up-front mortgage insurance (at 1.5% of the purchase price) and a monthly mortgage insurance at .500% of the loan amount annually.  The up-front mortgage insurance is financed back into the loan.

Please contact us if you have questions or comments about mortgage insurance, the market or loans!