PRIVATE MORTGAGE INSURANCE (PMI)

Private Mortgage Insurance (PMI) is a type of insurance that protects the lender against loss in the event that a borrower defaults. But what it means to homebuyers is that they can afford more house than they would otherwise.

How does this work?

Lenders believe their losses in a foreclosure sale would be about 20% of the home's value. They require you to cover the risk for this 20%. You can either put up 20% in a cash down payment, or buy a "mortgage insurance" policy (which pays the lender in the event of a foreclosure), or a combination of both (e.g. 10% cash, 10% insurance or 5% cash, 15% insurance, etc.). If you can't come up with a 20% down payment, you have to buy the insurance.

Is there an alternative to paying PMI?

Yes, in recent years lenders have become more creative with financing. In order to eliminate the need to purchase PMI, it is now very common for borrowers to get a 1st and 2nd loan on a property. Here's how it works:

You have 5% to put down. You create a 15% 2nd mortgage, giving you a total of 20% to put down on an 80% mortgage. Typically the 2nd mortgage is at a higher interest rate than the first. Given this, the purchaser is more likely to pay the second off quicker thus increasing equity in the home.

The benefit of creating this type of loan is that the interest can be deducted. PMI cannot be deducted. The end result gives the purchaser more buying power than using PMI.

The only negative to this strategy is sometimes the lender ends up charging expenses on both loans, so you pay double closing fees. Once again, a good lender will know how to originate two loans simultaneously without charging a small fortune.

HOMEOWNER'S ASSOCIATION FEES

What is a Homeowners Association ("HOA")?

In all condo and townhouse projects and in some residential subdivision or planned communities, the "common areas" of the property (open spaces, recreation areas, tennis courts, etc.) must be managed and maintained for the benefit of unit owners. To accomplish this, a homeowners' association is usually established when the project is created. The association will have an elected executive board which will manage the association and perform such tasks as enforcing the rules and regulations and collecting the homeowners' dues.

Do I have to join the association?

It depends on whether it is "voluntary" or "mandatory." Membership in an association is typically mandatory if the restrictive covenants are recorded in a property's chain of title. But some neighborhoods have less formal voluntary associations, generally with less power than mandatory associations. Regardless of whether it is mandatory or voluntary, if you are a member of the association, typically you will have a voice in its operation.

Do I have to pay association dues?

If your association is voluntary, then any payments necessary to maintain membership are also voluntary. However, if membership in the association is mandatory, you must pay all lawful assessments, dues or charges.

Is there any limit on what an owner has to pay to the association?

Not so long as the dues, charges and/or assessments are lawfully imposed in accordance with procedures established by the restrictive covenants. Sometimes, when assessments are for substantial undertakings (road maintenance, utility services, building maintenance, etc.) they can be costly; therefore, prospective purchasers should consider the amount of any current or pending dues, charges and assessments when determining whether they can afford the property. If an existing owner believes an association has improperly imposed a charge of some kind, only a court can determine whether it is lawful.

Do I have to join the association?
It depends on whether it is "voluntary" or "mandatory." Membership in an association is typically mandatory if the restrictive covenants are recorded in a property's chain of title. But some neighborhoods have less formal voluntary associations, generally with less power than mandatory associations. Regardless of whether it is mandatory or voluntary, if you are a member of the association, typically you will have a voice in its operation.

Can my homeowners' dues be increased?

Yes. The common expenses of your development may include grounds' upkeep, building maintenance, insurance premiums, property taxes and management fees. When these expenses go up, the cost is usually passed on to the property owners in the form of increased dues and assessments. The legal authority to increase dues and to assess homeowners should be set forth in the documents which govern the development.

Prior to signing a contract to purchase a condominium or townhouse, you should examine the governing documents to determine if you will be obligated to pay maintenance fees and assessments which may increase over time. You should find out who has the authority to establish fees and assessments and whether there are any limits to the amount which can be charged. You are less likely to be shocked by fee increases if you have read this information prior to signing a purchase agreement.

Can an owner avoid paying assessments for the common expense of the property?

No. All owners of condos (including the developer) must pay their share of common expenses. The same would also be true of townhouse owners if there is a clear and definite statement in the restrictive covenants specifying the purpose of the assessment and the authority of the homeowners' association to collect the assessment.