-- Baby Boomers -- Family -
-- Green -- Home and Auto --
-- In Critical Condition -- Lifestyle --
-- Just Starting Out -- Money --
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PMI Who?by Dawn Adams
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-- Baby Boomers -- Family - -- Green -- Home and Auto -- -- In Critical Condition -- Lifestyle -- -- Just Starting Out -- Money -- |
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In years past, many lenders only gave mortgages to people who could put down 20% or more down on the purchase of their new home. To open the market up, PMI was born. PMI protects the lender on those homebuyers who cannot put the full 20% down. This insurance allowed lenders to lend to the average man who could only afford 5% or 10%. Statistically, homebuyers who put less that 20% down are more likely to default on their loans. Since PMI only insures the 20% loss, PMI is to be revoked when the homebuyer reaches the 20% equity mark. However, for many PMI payments are never stopped leading to hundreds and possibly thousands of dollars of the homebuyer's money being wasted. PMI is purchased on a sliding scale based on the cost of the home, the amount put down, the type of the loan (variable or fixed), and length of loan. Loans with lower down payments, variable rates, and longer lengths receive higher rates than those who have greater down payments, fixed rates, and shorter terms. Typically on a 10% down, 30 year fixed, $100,000 loan, the homebuyer will pay $650 (.65%) in the first year and $350 (.35%) in the following years (www.toptenrealty.com/Qpmi.htm). These rates can usually be paid annually or monthly. The monthly option usually increases the rate slightly, although it may reduce the amount of money due at closing. Reaching this magic 20% can occur in one of four ways. One, the simplest to track is making your arranged payments and eventually paying off 20% of your loan. Providing there has not been a downturn in housing prices you will have reached your mark. Secondly and very commonly, housing appreciates in value. Therefore if the value of your house increases you may reach this mark much more rapidly. You can watch housing sale prices in your area to roughly gauge the worth of your house. This will later need to be verified by an authorized appraiser. Thirdly, making greater payments on your principle will also help you reach the 20% payoff mark more rapidly. Finally, value added home improvements may push up the overall value of your home and therefore help you to reach the 20% equity mark as well. No matter how you feel that you have achieved 20% equity in your home you now need to contact your lender to learn about their specific requirements for termination of PMI. Most will work with you as long as you have been current on your mortgage in the last twelve months. They most likely will require an appraisal done by an appraiser that they authorize. This typically costs about $250 which you the homebuyer usually have to absorb. This is done to verify that you have indeed met the 20% equity mark. Andrew Jacob, president of World Wide Financial, recommends that if the lender balks you may want to suggest that you will refinance with another company if they are not willing to help (Money Magazine, Oct 1998, "A new Break on Insurance"). Thoughtfully, Congress has reached out to us average homebuyers and passed Senate Bill 318 last summer that will soon force lenders to tell you when you have reached a 22% equity mark and cancel the PMI insurance. The law which will take effect in July of 1999 will allow lenders to cancel PMI insurance when the equity of 20% is reached on those homebuyers whose property has not declined in value, have no second liens on their home, and have paid on time for the previous two years. It requires cancellation of PMI when 22% equity is reached except for on jumbo loans of $227,150 or greater which much meet a 23% margin and on loans that are considered "high risk". High risk is not defined and for them payments may continue up to half the life of the loan. Although this is a step in the right direction there are two flaws that consumers should be aware of. One, the lender does not have to take into account the appreciation values of homes which may help homebuyers reach this mark much more quickly. Two, the automatic cancellation only applies to new loans. In the end, it is the homebuyer's responsibility. I strongly suggest you take a look at your loan or call your lender to see if you are paying unneeded PMI. If you can get it dropped from your loan perhaps you could continue making the original payment and route the additional money to pay down your principle. One extra payment a year could pay off a 30 year loan off 13 years early. Resource: Dawn Adams is the editor of A Personal Touch. Add A Personal Touch to your marriage, family, home and entertaining on a budget by subscribing to A Personal Touch, 24 Flintlock Dr., Durham, CT 06422. 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