When a home purchaser's down payment is less than 20% of the purchase price, they must obtain Private Mortgage Insurance in order to get a loan. This is about one in every three new loans. Getting rid of the Private Mortgage Insurance will save you considerable money, but it is not easy to get mortgage companies to drop the requirement.
The borrower pays it, but the lender gets the benefit -- PMI assures the lenders will get back their money if the borrower defaults on the mortgage loan. The insurance isn't cheap either, $47 a month for someone who puts 10% down on a $100,000 loan and $74 at 5% down.
The Homeowners Protection Act, which became law in 1999, provides some relief, but still favors the lenders. Here are the highlights of that law.
- It only applies to new mortgages, signed on or after July 29, 1999.
- Lenders must automatically cancel the PMI when the mortgage reaches 78% of the purchase price.
- If PMI has not been canceled or otherwise terminated by the chronological mid-point of the loan amortization period, the lender must automatically cancel the PMI (if the borrower is current on the loan payments).
- Borrowers can request that the PMI be dropped when the mortgage balance reaches 80% of the purchase price. However, you'll need to have a good payment history (not have paid your mortgage payment 30 days late within one year of your request or 60 days late within 2 years).
- It ignores how the appreciation in value adds to equity, which ought to make PMI disappear sooner.
If your home has appreciated in value so that you have 20% equity, you could refinance. However, paying closing costs to cancel the PMI payment will reduce or eliminate your cost savings.
So what's a savvy homeowner to do? Stay on top of the property values in your neighborhood and contact your lender to ask about its policies toward PMI. Many lenders will offer to drop the PMI policy when asked, although they may first require you to pay for an appraisal to show you have reached 20% equity and that the property doesn't have a second mortgage.