What
is PMI and how to get rid of it:
Real
estate lenders are a funny lot. It seems they're happy to
lend anybody money. Assuming a half-way decent credit rating,
any potential home buyer can secure a loan for a house. Why?
Because these transactions are secured by a very valuable
asset: the home itself. If a borrower defaults on a loan,
the risk for the lender is often only the difference between
the value of the home and the amount outstanding on the loan,
less the amount it costs them to foreclose and resell the
property.
For
this reason, lenders are very wary of lending more than a
certain percentage of a home's value. Traditionally, this
has been 80 percent. The cushion this provides the lender
helps ensure that their losses from loan defaults are kept
to a minimum.
In
recent years, however, it has become increasingly more common
to see home buyers using down payments of 10, 5 or even 0
percent. Naturally, loaning this much presents the lenders
with a lot more risk. To offset this risk, these transactions
often require Private Mortgage Insurance or PMI. This supplemental
policy protects the lender in case a borrower defaults on
the loan, and the value of the house is lower than the loan
balance.
PMI
has been a large money-maker for the mortgage lenders. The
amount of the insurance - often $40-$50 per month for a $100,000
house - is commonly rolled into the mortgage payment. Given
the size of the overall payment, this additional fee is often
overlooked. Homeowners continue to pay the PMI even after
their loan balance has dropped below the original 80 percent
threshold. This occurs naturally, of course, as the home owner
pays down the principal on the loan. On a typical 30-year
loan, however, it can take many years to reach that point.
Until
recently lenders were under no obligation to tell home owners
when they had reached a point where the PMI can be dropped.
That all changed in 1999, when the Homeowners Protection Act
took effect. In most cases, this law now obligates lenders
to terminate the PMI when the principal balance of the loan
reaches 78 percent of the original loan amount. Savvy homeowners
can get off the hook a little earlier. The law stipulates
that, upon request of the home owner, the PMI must be dropped
when the principal amount reaches only 80 percent!
It
is important to note that this law only applies to home loans
- whether first time or refinances - that closed after July,
1999. Also certain other conditions must be met, such as being
current on the loan payments. Buyers that purchased before
July 1999 can also have their PMI removed, but they must initiate
the process and though the lender is under no obligation to
do so, most will.
Of
course, there is another way that home owner's equity can
reach beyond the 80/20 percent ratio. Many areas of the United
States have seen significant gains in the value of real estate
over the past decade. In fact, certain areas have seen appreciation
levels of 100 percent or more. Even those people living in
areas with more modest gains may find that the value of their
property has quickly grown to the point where the amount of
principal they owe on their loan is less than 80 percent of
the home's current value. Again, in these cases, the lenders
are under no legal obligation to remove the PMI. In most cases,
however, as long as the home owner has been prompt on their
loan payments and don't represent an exceptional risk, the
lenders will agree to remove the extra fees.
The
hardest thing for most home owners to know is just when does
their home equity rise above this magical 20 percent point?
A certified, licensed real estate appraiser can certainly
help. It is an appraiser's job to know the market dynamics
of their area. They know when property values have risen -
or declined. Many appraisers offer specific services to help
customers find the value of their homes and remove PMI payments.
Faced with this data, the mortgage company will most often
eliminate the PMI with little trouble. The savings from dropping
the PMI pays for the appraisal in a matter of months. At which
time, the home owner can enjoy the savings from that point
on.
For
more information on PMI and the Homeowners Protection Act,
try this link:
Cancellation
of Private Mortgage Insurance: Federal Law May Save You Hundreds
of Dollars Each Year
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