What is PMI and How do I Get Rid of it?

Real estate lenders seem to be happy to lend just about anybody money. Assuming a half-way decent, any potential home buyer can secure a loan for a house. Also, any home owner can secure a refinance for a house. Why? These transactions are secured by the home itself (a highly valuable asset).

But what happens if the borrower defaults on the loan? From the lender’s viewpoint, the risk is the difference between the value of the home and the outstanding amount of the loan—minus what it costs to foreclose and sell the property. That is why lenders are often wary of lending more than a certain percentage of a home’s value. Traditionally, this has been 80 percent. This cushion provides the lender with assurance that their losses from loan defaults are kept to a minimum.

Lately, it has become more and more common to see home buyers using down payments of 10 percent or less (even 0 percent in some cases). Of course, lending this much means a greater risk for the lender. So, to offset this risk, Private Mortgage Insurance (PMI) is often required for these transactions. PMI is a supplemental insurance that protects the lender in case a borrower defaults on the loan, and the value is lower than the loan balance.

PMI has been a large money-maker for mortgage lenders. The amount of the insurance—typically $40 to $50 per month for a $100,000 mortgage—is usually rolled into the mortgage payment. When you think about the size of the overall payment, this fee is usually overlooked. Then, once the loan balance has reached below the 80% threshold, homeowners continue to pay the premiums. This occurs naturally as the homeowner pays down the principal on the loan.

Until 1999’s Homeowners Protection Act took effect, lenders were under no obligation to tell homeowners when they had reached the point that PMI can be dropped. In most cases, the law now obligates lenders to terminate PMI when the loan balance reaches 78 percent. A savvy homeowner will pay attention and can get off the hook a little earlier because the law states that, UPON REQEST OF THE HOMEOWNER, the PMI must be dropped when the principal amount reaches only 80 percent!

This law only applies to home loans (first time purchases and refinances) that closed after July, 1999. Also, certain conditions must be met—such as being current on the loan payments. For loans that closed before July 1999, the PMI can still be removed, but the homeowner must initiate the process.

There is one other way that a homeowner’s equity can reach beyond the 80/20 ration barrier. Even though Middle Georgia real estate has seen modest gains over the past few years, for many, the increase in value has been high enough that the amount of principle still owed is less than 80% of the home’s current value. Again, in these cases, the lender is under no 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.

So, how do you know if your home equity has risen above the magical 20 percent point? To find the answer, you need a certified real estate appraiser. It is the appraiser’s job to know the dynamics of the real estate market in his coverage area—and to know the directions of the market’s movement.

Hester Appraisals & Consulting offers you the specific services you need to help customers find the value of their homes and remove PMI payments. Once the homeowner provides this date to the mortgage company, they will most likely eliminate the PMI with little trouble. The savings from dropping the PMI pays for the appraisal in just a matter of months. The homeowner can then enjoy the savings of a lowered mortgage payment 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