Many new borrowers and current homeowners who have recently purchased will be subjected to PMI or private mortgage insurance.
When you take a mortgage with less than 20% downpayment you will be required by the lender to have private mortgage insurance with your loan.
You can eliminate your PMI when you have obtained 20% in equity in property either via paying down the mortgage or by benefiting from a rising market value of your home.
If you think your home has risen in value, and you now have 20% or greater in equity, you will may be able to cancel the PMI on your loan. You will be required to have a bank appraisal on the property. This will be an out of pocket expense for you. The national average for an appraisal is $362. If you want a preliminary, evaluation on the value of your property without having to spend money on a formal appraisal, give us a call at 617-648-3983. You could also use our tools to survey the landscape of recent home sales and properties on the market in your area to see if you have reached a 20% equity position.
I wanted to share this reat article that outlines how to eliminate PMI with you.
Cancel Your Private Mortgage Insurance
By: Richard Koreto
via HouseLogic.com |
Published: December 21, 2009
Private mortgage insurance is unavoidable for some homeowners, but don’t pay PMI premiums a day longer than required by your lender.
Private mortgage insurance provides protection to a lender in case you default on your home loan. Unless you make a 20% downpayment on a house, you’ll most likely be required to purchase PMI. PMI premiums on a median priced home ($198,100 in 2008) can run between $50 and $100 per month, according to the Mortgage Insurance Companies of America.
PMI might be unavoidable, but it isn’t eternal. Knowing exactly when you’re entitled to cancel coverage can save you a bundle. If you own a median priced home, you’ll pocket between $600 and $1,200 for each year’s worth of premiums you can avoid. That extra cash can be used to pay down your principal instead.
When PMI is cancelled automatically
Though often maligned, PMI plays an important role. Many aspiring homeowners, especially first-time buyers, simply can’t afford to put down 20% on a house. Without the safeguard offered by PMI, lenders would be reluctant to extend mortgages to low-equity purchasers.
For many borrowers, the coverage is short-lived. The Mortgage Insurance Companies of America, the industry trade group, estimates that 90% of homeowners are done paying PMI premiums, which are tax-deductible for some, within five years.
If you purchased a house since 1999 and are still paying PMI, you probably fall under the Homeowners Protection Act (HPA) of 1998. Your lender is required to automatically cancel your insurance once you’ve paid down your mortgage to a 78% (0.78) loan-to-value ratio, or LTV. Put another way, once you have 22% equity built up. Many lenders will treat pre-HPA loans in a similar fashion. Call to confirm.
To calculate your LTV, divide the outstanding loan amount by the original price of your home. If you have a $190,000 mortgage on a house you purchased for $200,000, the LTV is 95%. You’d need to get the mortgage balance down to $156,000—78% of the original value—to qualify for automatic cancellation of PMI.
When you need to request cancellation
You don’t necessarily have to wait for automatic cancellation. When your LTV hits 80%, you can petition your lender to end its PMI requirement. The process can take several weeks. Your lender isn’t obligated to grant your request, but you’ll bolster your case if you have a good payment history.
Start by calling your lender, not the PMI provider. You’ll probably need to make a formal request in writing and pay out of pocket for an appraisal. The average cost of an appraisal is $362, according to a 2009 Bankrate.com survey. Your lender will usually select the appraiser.
Although an appraisal is conducted primarily for the benefit of the lender to confirm that your property hasn’t declined from its original value, a high appraisal can work to your advantage. As your property value increases, whether due to a general uptick in real estate prices or specific home improvements, your LTV decreases.
Justine DeVito Tenney, a CPA and financial planner with Weiser LLP in Lake Success, N.Y., points out that even if you don’t meet the 78% or 80% milestones, you can get PMI cancelled when you hit the mortgage midpoint. On a 30-year fixed-rate mortgage, that would occur after 15 years of payments. This can come into play for certain high-risk loans that call for a longer PMI period.
A way around PMI premiums
In search of a PMI loophole? Look for so-called piggyback loans, also known as 80/10/10 or 80/15/5 loans. Basically, the home lender finances 80% and immediately gives you a second loan for 10% to 15%. You put down 5% to 10%. No PMI is required.
This alternative has traditionally been available for homebuyers with minimal capital but excellent credit. In tight lending environments, however, this arrangement is harder to come by. And even when piggyback loans are available, the extra interest you usually pay on the second mortgage may actually cost more than PMI premiums. Do the math.
This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.
Richard J. Koreto is a freelance writer. He has been editor of several professional financial magazines and is the author of “Run It Like a Business,” a practice management book for financial planners. He and his wife own a pre-Civil War house in Rockland County, N.Y.
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