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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 one of
these links:
Cancellation of
Private Mortgage
Insurance:
Federal Law May
Save You
Hundreds of
Dollars Each
Year
Private Mortgage
Insurance (PMI):
Law Requires
Lenders to
Cancel PMI
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