What is PMI and how to get rid of it!

    The risk for the lender on a piece of real estate is often 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 reason, lenders are very wary of lending more than a certain percentage of a
    home's value. Traditionally, this has been 80%. The cushion this provides the lender helps
    ensure that their losses, if the loan defaults are kept to a minimum.

    In recent years, however, it has become increasingly more common to see home buyers
    using down payments of 10, 5 or even 0 percent. Naturally, loaning this much presents the
    lenders with a lot more risk. To offset this risk, these transactions often require Private
    Mortgage Insurance or PMI. This supplemental policy protects the lender in case a
    borrower defaults on the loan, and the value of the house is lower than the loan balance.

    PMI has been a large money-maker for the mortgage lenders. The amount of the
    insurance - often $40-$50 per month for a $100,000 house - is commonly rolled into the
    mortgage payment. Given the size of the overall payment, this additional fee is often
    overlooked. Homeowners continue to pay the PMI even after their loan balance has
    dropped below the original 80 percent threshold. This occurs naturally, of course, as the
    home owner pays down the principal on the loan. On a typical 30-year loan, however, it can
    take many years to reach that point.

    Until recently lenders were under no obligation to tell home owners when they had reached
    a point where the PMI can be dropped. That all changed in 1999, when the Homeowners
    Protection Act took effect. In most cases, this law now obligates lenders to terminate the
    PMI when the principal balance of the loan reaches 78% of the original loan amount.
    Savvy homeowners can get off the hook a little earlier. The law stipulates that, upon
    request of the home owner, the PMI must be dropped when the principal amount reaches
    only 80%!

    It is important to note that this law only applies to home loans - whether first time or
    refinances - that closed after July, 1999. Also certain other 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.

    Of course, there is another way that home owner'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. In fact, certain areas have seen appreciation levels of
    100%, or more. Even those people living in areas with more modest gains may find that
    the value of their property has quickly grown to the point where the amount of principal
    they owe on their loan is less than 80% of the home's current value. Again, in these cases,
    the lenders are under no legal obligation to remove the PMI. In most cases, however, as
    long as the home owner has been prompt on their loan payments and don't represent a
    exceptional risk, the lenders will agree to remove the extra fees.

    The hardest thing for most home owners to know is just when does their home equity rise
    above this magical 20% point? A certified, licensed real estate appraiser can certainly
    help. It is an appraiser's job to know the market dynamics of their area. They know when
    property values have risen - or declined. Many appraisers offer specific services to help
    customers find the value of their homes and remove PMI payments. Faced with this data,
    the mortgage company will most often eliminate the PMI with little trouble. The savings
    from dropping the PMI pays for the appraisal in a matter of months. At which time, the
    home owner can enjoy the savings from that point on.


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