In 1997, the first time homebuyer's median home purchase skyrocketed to $108,000 over a median price of $92,000 in 1993 and 1995, an increase of 17 percent, according to the National Association of REALTORS®. The record home buying market, over 4.5 million homes sold this year, is being driven by first time home buyers, who accounted for 42 percent of home sales in 1997. With the starter home couple earning a combined income of $54,000, how are they financing these homes?

The starter home is usually an economic "Hail Mary" pass for most first time homebuyers who scrape together the down payment from relatives, wedding gifts, 401K plans, savings bonds, insurance, mattress money, and any other sources their creativity can muster. But despite pulling out all the stops, not many can come up with the $22,000 down payment required by most lenders.

That is where private mortgage insurance (PMI) comes in. Designed to protect the lender from borrower defaults, PMI enables the borrower to buy a home sooner, buy a bigger home, and enjoy the appreciation of the home and its tax advantages. PMI also allows the borrower to choose from a wider variety of loan types, including ARMs, GEMs, 15-year Fixed Rate, with an amount and terms that best meet their needs.

The lender wants to limit exposure or risk to 80% of the home's value, or $80,000. That means that the PMI must cover the remaining exposure. If a customer puts down 10% as a down payment, then the lender's exposure is at 90%, or $90,000 in financing. PMI insurance means that should a borrower default on the loan amount, the lender would be repaid the difference between the lender's exposure limit, in this case 80% and the buyer's down payment. The PMI would be on the difference of $10,000. As the monthly payments on the loan are made by the borrower, the loan is amortized down and the exposure for the lender is reduced.

On a $100,000 home, the PMI payment can range from approximately $50 to $75. Typically the PMI it is rolled into the mortgage payment and listed separately on the mortgage payment papers, along with property tax and homeowner's liability insurance deductions.

The down side of PMI is that it is a cost, and not tax deductible, but some PMI providers are finding a way around that, too. GE Capital Mortgage Insurance Company is among the innovators of new programs which allow payment of the PMI up front at closing. Since the approximately $2,000 cost is rolled into the mortgage loan amount, it therefore becomes tax deductible with every payment. There are even programs in place that provide a substantial refund for borrowers who choose to refinance within a few years, or who are transferred and must sell their homes.

On a conventional mortgage, most traditional lenders expect a down payment of about 20 percent of the cost of the home, but with higher home prices and tax incentives for mortgage interest deductions, many borrowers are either unable or prefer not to put all their cash in a down payment. Sometimes people would rather have their cash in other kinds of investments such as stocks, retirement plans, or college funds for children, etc.

Where you want to place your money should be the first thing to consider before buying a home, advises John Lewis, spokesperson for GE Capital Mortgage Insurance Company. "Do you want to invest more of it in a home or in other kinds of investments?"

"Next, buyers need to know that they don't have to accumulate 20% for a down payment. With PMI, they can move in with as little as zero to three percent down."

According to Lewis, PMI offers an advantage to those who may want to purchase a larger home. "If you are making $35,000 a year, and your Realtor recommends that you look at homes in the range of three times your income, you are looking at saving a $20,000 down payment, which isn't easy."

"You may also be paying rents of about $800 a month. With the tax advantage of your loan interest deduction, you can afford a bigger house payment than you would if you had to accumulate a large down payment. That means you can move in sooner and start enjoying the tax benefits and lifestyle immediately," he explains.

The PMI payment is not something that the home owner will live with forever. When the value of the home has appreciated, or when the loan has been paid down sufficiently, the PMI payment can be eliminated. The life of a mortgage isn't long, according to Lewis. Many home owners will not remain in their first homes or with their original mortgage long enough to eliminate the PMI.

According to recent research, many first time home owners move within the first five years. Many more choose to refinance their homes to take advantage of lower interest rates.

Congress has also stepped in to limit unnecessary PMI payments. This year, in response to complaints by some home owners that a few lenders were continuing to charge PMI payments long after the home loan had amortized below 80% of its value, legislation was passed that calls for automatic cancellation of PMI when certain criteria are met. Among other requirements, the loan must be current and amortized down to 78% of its original value. Some lenders may require that you have been in the home at least two years before you can ask them to drop the PMI.

"The customer also has the option of requesting an appraisal when the market suggests the home may have appreciated enough to warrant canceling the PMI," suggests Lewis. "A good idea is to talk to a Realtor and ask for a comparable market analysis to see what homes are selling for around you before you go to the expense of having the home re-appraised. "

Published: December 14, 1998

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Blanche is a renowned author of five real estate books. Her newest, Bubbles, Booms and Busts: Make Money In Any Real Estate Market, McGraw-Hill, was rave-reviewed by The New York Times. She was also selected from hundreds of real estate experts to contribute to Donald Trump's book, Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Rutledge Hill Press, and is featured on page 68. Order Now Review - Honors In 2006, Blanche was selected among scores of candidates to author two consumer real estate guidebooks for the National Association of Realtors: The NAR Guide to Home Buying, and The NAR Guide to Home Selling, Wiley & Sons. She is currently planning two new books for the NAR and its members.       Known for her keen insight into real estate industry issues and for her ability to make complex subjects easy to understand, Blanche is a sought-after keynote and continuing education speaker. Real estate organizations from MLSs, to brokerages, to franchisors, to associations hire her to provide up-to-the-minute analysis of real estate industry news and advice on how to improve revenues. Her passionate delivery, peppered with stinging wit, is a huge hit with audiences and fans. Don Klein, CEO Greater Nashville Association of Realtors, Blanche Evans, Richard Courtney, president 2007, GRAR "The GNAR membership meeting last week featured Blanche Evans as the keynote speaker. Her comments and insights resonated extremely well with those in attendance and we have had many requests for copies of her PowerPoint Presentation. She was a terrific part of the membership meeting and convention program!" - Don Klein, CEO Greater Nashville Association of Realtors Coverage from WSMV, Nashville - 8-14-2007 That Interview Guy - Get Inside The Head Of Today's Generation 2007 AE Institute Session - To purchase 2006 AE Institute Session - Parts 1 2 3 4 5 6 7 8 9 HouseValues Mastermind call - Parts 1 2 Blanche's fireside chat with Jeremy Conaway, HAR - Click here. For more articles by Blanche, click here.