Mortgage insurance, or PMI, is added to a house payment when someone buys a house with a down payment of less than 20%. Basically, FNMA guidelines require a 20% down payment so that if the borrower defaults, or stops repaying the loan, the lender can foreclose and recoup their money. The 20% allows enough room for the foreclosure sale to cover such costs as damage to the house, legal and court costs, late penalties, etc. in addition to the 80% loan.
Many borrowers do not have 20% to put down, so the lender takes out an insurance policy to cover the missing part of the 20%. A borrower buying a house with no down payment will pay a higher PMI than a borrower putting down 10%. PMI can add an extra $50, $100, or more to a monthly payment.
Pay attention to the equity in your house if you are already paying PMI. Each month, when you make your house payment, you pay down your loan balance at little bit. In most areas, the value of your house is also rising each month. When this combination puts you in a 22% equity situation, which means your loan balance is 78% of the value of your home or less, you can have your PMI removed. You’ll have to hire a state certified appraiser to appraise your home, which will cost around $300 to $350. It also helps if you use an appraiser who is approved by your lender – call them for a list of appraisers before you start. You’ll need this appraisal to prove to your lender that you “own” at least 22% of your home. If you want an estimate of your homes value before you pay for an appraiser, contact the Realtor who sold you the house, or use one of the many free services on the internet such as www.ezHomeFree.com. Once you have the proof in the form of an appraisal, contact your lender and in most cases they will eliminate the PMI.
Another alternative is to refinance your home. This is more expensive than just hiring an appraiser, but if your lender is very difficult to deal with and refuses to drop the PMI, it may be worth the expense. Many people choose this option to switch to a different type of loan, for example, a 15 year mortgage instead of 30 to pay off the loan faster, or a home equity line of credit (HELOC), or even a loan with flexible monthly payments, so you can pay more or less each month according to your schedule.
I understand there is a third option, although I don’t personally know anyone who has tried it. It involves filing claims for PMI refunds each month in small claims court, and getting default judgments when the lender fails to show up. Of course, you must be making your payments on time. If you have any experience with this method, I would love to hear about it. Please email me at info@ezHomeFree.com.
In my next article we’ll look at ways to avoid PMI from the start when buying or refinancing a house.
~ Dan Hoffman, Mr. Homes & Loans