THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Saturday, December 10, 1994 TAG: 9412080314
SECTION: REAL ESTATE WEEKLY PAGE: 14 EDITION: FINAL
COLUMN: What it's Worth?
SOURCE: Thomas Tye
LENGTH: Long : 107 lines
My husband and I recently moved to Hampton Roads and bought a new home. After all the dust settled and a nightmare closing, I discovered that we were paying $90 per month for PMI since we elected to put only 5 percent down on the purchase of our home.
Our financial advisor suggested that we could purchase a term life insurance policy that would cover the cost of the home, and by doing this we could better control where our money is going.
When I called the bank servicing the mortgage, (the mortgage had already been sold), they told me we had to have PMI. They also said that this was not a state law, just a requirement of the financial institution and they had no information in writing explaining this.
The person I spoke with also could not explain the reason for it or why we couldn't serve the same purpose with a life insurance policy.
Could you please explain PMI to me? The cost ended up being $150 more a year than first explained and I have no policy and no information on what I am expected to pay for or even how long it will be required. Thank you for your help.
Private mortgage insurance, PMI, is required by most lending institutions when the loan to value ratio, LTV, of a first mortgage exceeds 80 percent.
For example, if a house is being purchased for $100,000, and the loan is more than $80,000 then PMI would be required.
If the loan is less than $80,000, this insurance would not be necessary. The life insurance policy that your investment advisor suggested is totally separate and independent of the real estate.
The reason for PMI insurance is to protect the lender if the borrower defaults on the loan, not in case of the lender's death. PMI insures the amount of the loan which exceeds 80 percent in case of a default.
When a default occurs on a loan covered by PMI, the insurance company pays the lender a certain percentage of the mortgage. This decreases the likelihood of a loss for the lender and causes the risk to be spread between the lending institution and the insurance company.
The insurance allows many loans that would not ordinarily be available because of high loan to value ratios.
The downside of PMI insurance is that you must pay the premiums. However, it benefits the lender, not you. This is the reason that you do not have a copy of the policy. You are not the beneficiary of the insurance and therefore do not need to know under what terms or conditions there would be payment.
To determine the requirements for having the insurance eliminated you should contact, in writing, your servicing agent or the investor who has purchased the loan. You should request that they send to you, in writing, exactly what they require of you to have the insurance eliminated.
There are insurance companies that notify borrowers when the loan to value ratio drops below 80 percent; however, some do not. This leaves the responsibility up to you to eliminate the insurance.
Some financial institutions allow elimination of the insurance premium only when the loan to value ratio falls below 80 percent due to debt amortization.
However, some will allow this if the value of your home has risen to a point that the loan to value ratio is below 80 percent. Through some combination of the two, or through curtailing a portion of the debt, it will be possible for you to stop paying this additional premium.
If you recently bought, it is unlikely that the value has increased enough for you to do this without making an additional down payment to achieve an LTV of 80 percent or less.
In cases where an increase in the value of your home can count towards decreasing the loan to value ratio, it will be necessary for you to pay for a professional appraisal. If this is the case, be sure your lender will accept the appraiser that you select. Is an appraisal official?
I own an apartment building in Virginia Beach and recently decided to sell it. Not having kept up with values, I engaged a professional appraiser to advise me. I was, however, somewhat disappointed with the estimate that the appraiser came up with.
While I understand the appraisal process, I believe that the economy has improved locally during the past few months and this should affect the value.
I have been able to increase rents and I think that I can sell this building for more than the appraised price. Also, the recent changes in the 1994 tax laws make investments like this more attractive now.
My question is, will the appraisal be part of some type of general knowledge or public record, or can I sell the property for more than the appraised price?
The appraised value and the contents of the report are confidential and privileged information that the appraiser is unable to divulge to anyone without your permission.
There is no type of public record of this professional advise and you are under no obligation to disclose the contents unless you choose.
Many sellers use appraised values as marketing tools to ensure potential buyers that the property is competitively or aggressively priced. Usually, when someone anticipates selling the property for more than the appraised value, then the report and its contents are not revealed.
This applies whether or not you are selling an office building, an apartment building or a single family home. Regardless, the appraised value is an estimate of the expected selling price and is not a fact to be found.
Properties frequently sell for more or less than the estimated value in an appraisal. MEMO: Thomas Tye is a Member of the Appraisal Institute and is a Senior
Residential Appraiser. He has evaluated commercial and residential
property in Hampton Roads for more than 15 years. Send comments and
questions to him at Real Estate Weekly, 150 W. Brambleton Ave., Norfolk,
Va. 23510.
by CNB