Obama Lowers PMI
FHA (Federal Housing Administration) authorities have been under pressure from President Obama, U.S. senators, and bankers, to reduce the PMI rate, which they say is sidelining many potential buyers. President Obama has announced that the rates will drop by ½ of a percentage point, from 1.35 to 0.85 a change that will save the borrower an average of $900 dollars each year. The FHA is a major provider of mortgages for first time buyers and middle or lower income families due to its low down payment requirements (as low as 3.5% of the purchase price).
What exactly is PMI? It is also referred to as Primary Mortgage Insurance and is the bank’s (or other lender’s) safeguard in the event that the borrower defaults on the primary mortgage, isn’t able to continue making payments, and the home ends up in foreclosure. Most lenders will generally require an applicant to provide a 20% down payment when applying for a loan to purchase a home. If the prospective buyer is unable to make that down payment, the lender often views that loan as a high risk investment and requires that the borrower pay the premium for PMI.
The PMI premium is generally added to the monthly mortgage payment that the homeowner makes. Over a period of several years of payments, the borrower may have paid enough towards the principal of the loan that they can have the PMI payment removed. Many homeowners don’t even know, or may have forgotten that this insurance premium can be removed once an acceptable level of payment has been achieved.
The lowered PMI rates have the potential to bring between 90,000 and 140,000 additional home purchases per year according to the National Association of Realtor’s estimates. Chris Polychron, president of the NAR, stated that they were optimistic that the more affordable loans by the FHA would positively impact many first time buyers entering the market and that while some critics condemned the move as premature, the NAR applauded it wholeheartedly.
