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What is PMI and how to get rid of it. . .

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.  Lenders, therefore, are wary of lending more than a certain percentage of a home's value.  Traditionally this has been 80 percent.  This cushion ensures lenders that their losses from loan defaults are kept to a minimum. 

However, in recent years it has become increasingly common to see home buyers using down payments of less than 20 percent ( 0/5/10 percent downs).  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 is a large money maker for  mortgage lenders.  The amount of the insurance is often $40-50 per month for every  $100,000 and is commonly rolled into the mortgage payment.  Given the size of the payment, it is often overlooked and homeowner continue to pay PMI even after their loan balance has dropped below the 80 pecent threshold. 

Until recently, lenders were under no obligation to tell home owners when they had reached the point where PMI could be removed.  However, that changed in 1999, when the Homeowners Protection Act took effect.  This law now obligates lenders to terminate the PMI when the principal balance of the loan reaches 78 pecent of the origianl loan amount. 

Savvy homeowners can get off the hook a little earlier.  The law stipulates that UPON REQUEST from the homeowner, PMI must be dropped when the principal amount reaches 80 percent.   Note that this law only pertains to home loans, whether first time or refinanced, that closed after July 1999.  Other conditions apply, such as being current on the loan payments.  Buyers who purchased before July 1999 can also have PMI removed, but they must initiate the process and although the lender is under no obligation to remove the PMI payment, most will remove it upon request. 

One other way to reach the 80/20 percent threshold is through rising appreciation levels.  Again, in these cases, the lenders are under no legal obligation to remove PMI.  However, in most cases, if payments have been promptly paid and don't represent any additional risk, the lenders will agree to remove the PMI payment.

With the help of a licensed appraiser, a homeowner can determine if their home equity has reached the 20%+ level, with an appraisal report.  If the appraisal report supports the 20% equity, it can be provided to the mortgage company, which will most often eliminate the PMI with little trouble.  The savings from dropping the PMI pays for the appraisal in a matter of months. 

 

Capital Ventures LLC

San Diego Appraisal Services

Ph:  858.531.4068  Fax:  888.260.4912

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