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What is PMI and how to knock it off your bill

Assuming you have a decent credit rating, any prospective home buyer can secure a home loan. These transactions are secured by a very valuable asset: the home itself. If a borrower does default on the loan, the risk for the lender is normally 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 specific reason, lenders are very suspicious of lending more than a certain percentage of a homes value. Usually, this has been 80 percent. This leeway helps ensure the lender that their losses from loan defaults are kept to a minimum.
 
In the past few years, however, it has become more and more common to see home buyers using down payments of less than 10 percent, sometimes even zero. Obviously, loaning this much money presents the lenders with a great deal of risk. To make up for this risk, these loans often require Private Mortgage Insurance (PMI). This supplemental policy protects the lender in case a borrower defaults on the loan, and the value of the house is less than the loan balance.
 
PMI has been very profitable for the mortgage lenders. Many homeowners overlook this fee and continue to pay for it even though their loan balance has dropped below the original 80 percent threshold. This occurs as the homeowner pays down the principal on the loan. On a 30-year loan, it can take years to reach that 80 percent.
 
In 1999 the Homeowners Protection Act was put into effect and that act obligated lenders to inform homeowners when they had reached a point where the PMI can be dropped. Before the Homeowners Protection Act took place, lenders were not obligated to notify homeowners. In most cases, this law now obligates lenders to drop the PMI when the principal balance of the loan reaches 78 percent of the original loan amount.
 
It is important to note that this law only applies to home loans that closed after July, 1999. Other certain 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.
 
Another way that homeowner’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. Some houses have doubled in value. Even people residing in areas with more reserved gains may find that the value of their property has grown to the point where the amount of principal they owe on their loan is less than 80 percent of the homes current value. When this does occur, the lenders are under no legal obligation to remove the PMI. Most of the time as long as the home owner has been on time with their loan payments and don’t represent a huge risk, the lenders will agree to remove the extra fees.
 
One of the most difficult things for most homeowners is to know when their home equity rises above the 20 percent point. A certified, licensed real estate appraiser can definitely help. It is an appraiser’s job to know the market of their area. They know when property values have increased or decreased. Many appraisers offer specific services to help homeowners find the value of their homes and remove PMI fees. Once the mortgage company is provided with this information, most will eliminate the PMI. After only a few months the appraisal has paid for itself. Then the homeowner will be saving money every month.
 
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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