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About Private Mortgage Insurance (PMI)
With a respectable credit rating, many potential home buyers can obtain a loan for their house. Why? Because those transactions are secured by a very valuable asset: the property itself. Should a borrower default on a loan, the lender's risk is usually the difference between the property's value and the outstanding loan amount less the costs of foreclosure and reselling the property.
Because of these additional costs, lenders are wary of lending more than a certain percentage of a property's value. Traditionally, that percentage has been 80%.
It has become common to see home buyers using down payments of 10, 5 or even 0%. Naturally, loaning this much presents the lenders with substantial risk. To help offset this risk, these transactions often require Private Mortgage Insurance or PMI. This supplemental insurance policy protects the lender in case a borrower defaults on the loan and the value of the property is lower than the loan balance.
PMI has been very profitable for the mortgage industry. The amount of the insurance, often $40 to $50 per month for a $100,000 property, is commonly rolled into the mortgage payment. Given the size of the overall payment, this additional fee is often overlooked. Homeowners continue to pay PMI even after their loan balance has dropped below the 80% threshold. This usually occurs because the home owner pays down the principal on the loan and their equity in the property reaches 20% or more.
Lenders were under no obligation to tell homeowners when they reached a point where the PMI could be dropped. That changed in 1999 because of the Homeowners Protection Act. In most cases, this law now obligates lenders to terminate the PMI when the principal balance of the loan reaches 78% of the original loan amount. Savvy homeowners can get off the hook even earlier. The law stipulates that, upon the request of the homeowner, PMI must be dropped when the principal amount reaches 80%!
It's important to note this law only applies to home loans that closed after July, 1999. Certain other conditions must be met such as being current on the loan payments. Buyers that purchased before July 1999 can still have their PMI removed but they must initiate the process. While the lender is under no obligation to accommodate, most will.
There's another way a homeowner's equity can exceed 20%. 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% or more. Even those people living in areas with modest gains can find that the value of their property has quickly grown to the point where the principal amount of their loan is less than 80% of the property's current market value. In those situations, the lenders are under no legal obligation to remove the PMI. However, as long as the homeowner has made on-time payments and don't represent an exceptional risk, the lenders will usually agree to removing the extra PMI fees.
The hardest thing for most homeowners to know is just when their equity rises above this magical 20%. We are definitely in a position to help! It's our job to know the market dynamics and values in our practice areas.
We know when and where property values have risen or declined and can provide services to help you determine the value of your property and hopefully remove the PMI payments. In light of the data we provide, most mortgage companies will often eliminate the PMI with little resistance.
Those monthly PMI savings quickly offset the cost of the appraisal and the homeowner enjoys the savings thereafter.