Any home buyer who puts down less than 20% of the purchase price quickly becomes familiar with private mortgage insurance. This extra monthly charge of $50 to $100 for every $100,000 borrowed protects your lender against your potential default. And up against the mega-amount of the total loan, it seems small enough. But PMI adds up--simply because it can take years to reach that magic 20% equity threshold where it is no longer required.
Now there's good news for PMI payers. Given the appreciating real estate market, chances are you can get free of PMI much sooner than you expected. That's because the median sales price for a home rose 5%, from 1999 to 2000, and as high as 27.5% in some parts of the country, according to the National Association of Realtors. As a result, the equity in your home has likely increased, too--enough that it now exceeds that 20% of your home's value. (Another way to look at this is that the loan balance is less than 80% of the value.) By spending a mere $100 to $300 for a new appraisal, and petitioning your lender for a waiver, you should be able to cancel your PMI for good.
ROUGH ESTIMATE. It's a simple process--which many people don't realize. HomeGain, a real estate Web site, recently estimated that 2.7 million homeowners were paying PMI needlessly. Indeed, 58 of the 61 cities HomeGain examined registered increases in median sales prices from 1997 to 2000 sufficient to give many payers 20% or more equity ratios.
Don't think PMI affects only struggling young couples scraping together the cash for fixer-uppers. Upscale homebuyers may carry it as well, particularly those in recent years who have chosen to offer minimal down payments in order to stay fully invested in stocks--a move some of them now surely regret.
So if housing prices in your neighborhood have risen markedly, you should start by calculating your equity ratio: loan balance to value. You can obtain a rough estimate of current value by asking your realtor or checking the valuation tools at various Web sites (table). HomeGain offers a calculator that asks you to plug in your monthly PMI payment, purchase price, the percentage put down, your outstanding balance, and the current value of your home. It then tells you, based on the ratio of your loan balance to the current value, whether PMI is still required and how much you could save.
Don't waste money on an appraiser until you know your lender's criteria. You'll need to have a good payment history--no more than 30 days late in the past 12 months and no more than one late penalty. You also may have to wait a minimum period of, say, 24 months after you started paying the mortgage to become eligible.
The next step is to contact your lending institution for the waiver application and, as directed, hire an appraiser. You'll often pay less if you retain the lender's preferred professional. You have scant cause to worry about a conflict of interest: The appraiser will simply pay you a house call, look around, and, if all goes well, confirm that your real estate investment is as good as you think.
What if your lender still balks? You've got some rights. The federal Homeowners Protection Act mandates that lenders automatically cancel PMI once a borrower's equity reaches 22% of your home's value at the time of purchase. In New York last December, the state attorney general won a $4 million settlement from six lenders who had failed to inform 10,000 homeowners that they had reached New York's own 25% equity threshold for waivers. The message? Keep track of your PMI; your lender may not.
Once freed of the PMI payments, you can save thousands of dollars a year that you will no doubt pump back into the house anyway--for those roof repairs or replacement of that faulty furnace. At least you'll be shelling out money that is to your benefit, not the bank's.
By Joan Oleck