What is Private Mortgage Insurance?
Private mortgage insurance (also known as "PMI") is
usually required
when you borrow money for a house and your loan balance exceeds 80% of
what your house is worth. For example- let's say your house is worth
$100,000. Your lender would likely require PMI if you borrow more than
$80,000. You would pay a PMI premium as part of your monthly mortgage
payment. You can check your payment information from your lender for the
exact amount you pay. We've had clients pay anywhere between $30 and about
$120 per month. PMI can obviously be very costly.
Who benefits by having PMI?
PMI is a benefit for the lender in case you
stop making your loan payments and go into foreclosure. The PMI covers
part or all of their loss depending on the agreement with the company that
provides the PMI. It is not insurance for you! You do benefit from PMI
somewhat when you purchase your house because it allows you to have less
of a down payment than what would normally be required. However, once
you build up at least 20% equity then most lenders are required to
drop your monthly PMI payments. This equity build up can be accomplished
by your house increasing in value over time and/or a drop in your
mortgage balance as you continue to make your payments. If your
neighborhood values have been increasing or if you've made improvements
to your house, then you may have more equity than you think.
Does my lender have to remove PMI when I get 20% equity?
Typically, yes. However, your lender may have
some other guidelines such as a requirement that you actually keep your
mortgage for a certain amount of time and that all of your payments are
current and they'll make sure you haven't placed any more mortgages
against your property. You'll need to contact your lender for their
specific requirements.
The removal of PMI became much easier in 1998 when a new law called the
Homeowner's Protection Act of 1998 was passed. If you are interested,
here is the actual text of the
Homeowner's
Protection Act. Anyway, the new Act requires lenders to be more
proactive with letting you know your rights with respect to removing your
PMI. You probably received information on PMI removal with your closing
documents when you first got your mortgage. Your lender should also be
providing yearly notification of the PMI removal process.
How do I know how much equity I have?
You can determine your equity by ordering a
current appraisal on your property. The difference between the market
value of your house and your loan balance equals your equity. We can provide that sort of appraisal for
you. While we can't guarantee that you'll have 20% equity, at least
you'll know for sure by ordering an appraisal. If you don't have 20%
equity then you'll need to check the value of your house again in the
future. Most people pay a high enough PMI premium so that our appraisal
fee is recouped in about 2-3 months. We provide a substantially discounted fee to develop another
appraisal on your house in the future. Beware of any appraiser who
accepts an order from you and guarantees that the value of your house
will be high enough before doing the work. That's against the law.
Furthermore, most lenders will review any appraisal you provide to them.
You wouldn't want to be providing a fraudulent appraisal to your lender.
So, what do I do next?
The first step is to contact
your lender to see what requirements they have for dropping PMI. You can
find their telephone number in your monthly payment book. Some lenders
will require that you send them a letter requesting information on the PMI
removal process. They'll typically require that you provide them with an
appraisal by a state licensed or certified appraiser. Once you have that
information then give us a call.
I'm really confused with all these details, and not
really good at math. Help!
Feel free to contact us at (630)897-3339. We
get calls all the time from homeowners who want to get their PMI removed
and are really confused with the process. We'll answer any questions you
may have and guide you through the process.
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