Remove Your Private Mortgage Insurance (PMI)A 20% down payment is usually accepted when getting a mortgage. Since the risk for the lender is often only the remainder between the home value and the amount remaining on the loan, the 20% provides a nice buffer against the charges of foreclosure, selling the home again, and natural value changes in the event a purchaser defaults.
Lenders were working with down payments as low as 10, 5 and even 0 percent during the mortgage boom of the mid 2000s. How does a lender manage the added risk of the small down payment? The answer is Private Mortgage Insurance or PMI. PMI takes care of the lender if a borrower is unable to pay on the loan and the value of the property is lower than what is owed on the loan.
Because the $40-$50 a month per $100,000 borrowed is compiled into the mortgage payment and oftentimes isn't even tax deductible, PMI can be costly to a borrower. Separate from a piggyback loan where the lender takes in all the costs, PMI is money-making for the lender because they collect the money, and they get the money if the borrower defaults.
How can home owners keep from paying PMI?The Homeowners Protection Act of 1998 obligates the lenders on nearly all loans to automatically terminate the PMI when the principal balance of the loan equals 78 percent of the initial loan amount. The law stipulates that, at the request of the homeowner, the PMI must be dropped when the principal amount equals just 80 percent. So, savvy home owners can get off the hook a little early.
Considering it can take several years to arrive at the point where the principal is only 80% of the original amount of the loan, it's crucial to know how your Minnesota home has appreciated in value. After all, any appreciation you've acquired over time counts towards removing PMI. So why pay it after the balance of your loan has fallen below the 80% mark? Even when nationwide trends hint at declining home values, be aware that real estate is local. Your neighborhood might not be minding the national trends and/or your home may have secured equity before things declined.
An accredited, Minnesota licensed real estate appraiser can help homeowners figure out if their equity has reached the 20% point, as it's a hard thing to know. It is an appraiser's job to know the market dynamics of their area. At Advent Appraisals (763) 350-4816, we're experts at recognizing value trends in Isanti, Isanti County, and surrounding areas, and we know when property values have risen or declined. Faced with information from an appraiser, the mortgage company will generally cancel the PMI with little effort. At that time, the homeowner can retain the savings from that point on.
Want to learn more about PMI and the Homeowners Protection Act? Click this link:
Cancellation of Private Mortgage Insurance: Federal Law May Save You Hundreds of Dollars Each Year