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Mortgage Insurance

Historic Home savings bank (now Chase) at the corner of Sunset and Vine

When your down payment is less than 20%, lenders view these loans as riskier and require “private mortgage insurance”, also called PMI.  PMI is insurance that protects the lender if you default. PMI is an additional monthly expense that doesn’t really do anything for you. Most buyers can’t wait to get rid of it.

PMI cost can vary. Use this calculator to get an idea:

http://www.goodmortgage.com/Calculators/PMI.html

PMI will be removed automatically once you reduce principal balance to 78% of original purchase price. Homeowners Protection Act of 1998 made this law. With 5 percent down payment, it takes about 10 years for PMI to go away. For 10%-15% range it takes 5-7 years.

300,000 purchase price 4% interest rate 30 year fixed

DownpaymentLoan Amount/Drop off amtLength to get there
5%$285,000/$234,0009 years
10%$270,000/$234,0006 years
15%$255,000/$234,0005 years
For FHA loans you must pay PMI a minimum of 5 years or 60 months no matter what.

PMI payments stop when you have reduced the loan to  value ration 80%. You might be clever and ask, what if the real estate market goes up increasing my property value?

Let’s consider the above Scenario of a $300,000 purchase. Let’s suppose the market  increases 10% over five years and you only put down 5% originally. That represents an increase of $30,000 for your property value. Instead of waiting 9 years for the PMI to go away, it goes away in 5. It isn’t that simple though, because your lender doesn’t know that your property value has gone up. They are sticking to their original schedule. You actually have to call your lender and request an appraisal. You have to pay for this appraisal- maybe $400-$500. If the appraisal comes back and your current loan balance represents 80% LTV or less, then your PMI will be removed. However if you fall short of the 80% LTV, even just 81%, the PMI stays and you are out your appraisal cost.

Pay more interest: Some lenders will waive the mortgage insurance requirement if the buyer accepts a higher interest rate on the mortgage loan. The rate increases generally range from .75 percent to 1 percent, depending on the down payment. The advantage is that mortgage interest is tax deductible where as PMI is not. Ask your lender.

Not sure if something is a fixture?

M-A-R-I-A is an acronym for the legal test the State of California uses to determine whether an item is considered a fixture or personal property.

  • Method of attachment. Is the item permanently affixed to the wall, ceiling or flooring by using nails, glue, cement, pipes, or screws? Would removing the item damage the property? Even if the item is easy to remove, it may still be a fixture.
  • Adaptability. If the item becomes an integral part of the home, it cannot be removed. For example, a security system. One could argue that custom designed appliances such as a Miele wine refrigerator can be considered a fixture, although it can be unplugged, because it fits inside a specified space.
  • Relationship of the parties. Buyer to Seller, Landlord to Tenant.
  • Intention of party when the item was attached. When the installation took place, if the intent was to make the item a permanent attachment, for example, a built-in bookcase, the item is a fixture.
  • Agreement between the parties. Whatever is written in the Contract rules. If there is nothing in writing, it is not possible to prove the intention of the parties.

Special Notes for Tenants and Buyers- I never recommend to improve a property you do not own. Sometimes buyers will get excited in escrow and start ordering custom drapes, or hire a contractor to do some work. Tenants sometimes will work out “deals” with their landlord to reduce the rent in return for them to upgrade an appliance, or remodel. If the buyer doesn’t close, you are out of pocket for the money spent. For tenants, if they pay to install a fixture in a landlord’s property and get nothing in writing, they will probably have to leave it when they move. Be extra careful when purchasing tenant occupied property to ask the tenant what is their property and what is the owners. Finding out who owns what can save yourself a lot of headaches later on.

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