PMI, the acronym for private mortgage insurance, allows individuals to purchase their home with less than a 20% down payment. If you are paying PMI, the question you need to ask is; “Is it time to stop paying monthly PMI into an escrow account and instead start putting that into saving money?”
Every month, if you’re like most of us, you dutifully make your mortgage payment. Have you ever given any thought to exactly what makes up your monthly payment? For most of us, the mortgage payment not only pays off the mortgage loan, but a portion also gets placed into an escrow account to pay for real estate taxes and a variety of different types of insurance (homeowners, hazard, flood, and PMI, etc).
If you purchased your home with conventional financing and put less than 20% down, it’s likely you’re paying PMI. Private mortgage insurance protects the lender or investor against loss if a borrower stops making payments. Often, homeowners mistakenly pay this insurance years after it’s no longer needed and as a result end up paying thousands in useless insurance premiums.
Here’s the good news that many homeowners don’t realize – Once you’ve reached 20% equity in your home by appreciation, improvements made to the home or by paying down the principal balance of the mortgage (or any combination of the three), you can request the lender to cancel the private mortgage insurance. All you have to do is request in writing that the private mortgage insurance be canceled (most lenders have a brief form which must be filled out) and they require proof that the property exceeds the 20% equity position.
In most cases, the necessary proof is a state certified appraisal. Recent legislation (the Homeowners Protection Act) requires servicing lenders to make homeowners aware of the existence of any PMI they might be paying for and the requirements necessary to have it cancelled. Fortunately, you don’t have to wait for the lender’s notification to eliminate the PMI. In most cases, if you have equity of 20% or more you’ll be able to cancel it almost immediately with proof through a valid home appraisal.
PMI is not required in all instances. The general rule is that if a homeowner has put down less than 20% down on a home purchase (single family), mortgage insurance will be required. Homes purchased with a down payment of at least 20% should have enough equity to cover any potential losses by the lender, so PMI is generally not required. There has been a surge in the mortgage insurance industry because of the popularity of purchasing homes with less than 20% down. MICA claims that because of mortgage insurance making up for the down payment difference, over 15 million Americans have been able to purchase homes over the past four decades.
PMI does not protect a homeowner against loss, so a borrower that’s required to purchase it will probably never deal with the mortgage insurance company itself. All dealings concerning mortgage insurance are usually handled by the lender. It’s also the lender (or the eventual purchaser of your mortgage loan, if any) who has the ultimate decision when it comes to mortgage insurance, meaning how much and when the homeowner has built up enough equity in the property to drop the insurance. Therefore one must remain in contact with the lending institution which services their mortgage (collects the monthly payments) to inquire about this type of insurance and the requirements necessary to have it cancelled.
After a homeowner has built up 20% equity for a single family owner occupied residence (a few banks may require as much as 25% equity – check your loan documents to ascertain what applies in your situation) in the home, they may begin to initiate steps towards canceling the mortgage insurance. The first step is to contact the lending institution to where you send your mortgage payments (loan servicer). This may or may not be the lender who gave you the loan originally. Your loan servicer will be able to help you with the cancellation procedure and will also be able to tell you exactly how much your remaining mortgage balance is. Every loan servicing institution can have different policies regarding this procedure. Ask your servicing lender to provide in writing their specific requirements to cancel PMI insurance.
Keep in mind it’s the servicers’ ultimate decision and they’ll take many factors into consideration including the borrower’s payment history over the life of the loan before allowing you to drop this insurance. This factor alone could alter the servicer’s decision but with an appraisal you can provide them with part of the data that is needed.
Although mortgage insurance may have allowed you to purchase a home, there will come a time when this added monthly expense will no longer directly benefit you. Therefore, it’s in your best interest to keep the provisions surrounding it’s cancellation in mind because no one is going to cancel it for you.
You are, ultimately, your own financial adviser, and even the smallest expenses should be eliminated if at all possible. By continuing to carry PMI which is no longer required, nor needed, only decreases the amount of money you have available.
Most lenders require a real estate appraisal to be completed by a state certified appraiser as the primary proof required to eliminate unnecessary PMI insurance. At Straw Hat Enterprises I specialize in helping homeowners rid themselves of unneeded and unwanted PMI insurance. Make sure to discuss with your lender the process prior to contacting an appraiser. The lender will help give you some direction. If they are not helpful, contact me and I will give some things to ask of the lender that will better help you understand the process.
I offer an initial consultation and will discuss with you the process to determine, if you have sufficient equity in your home to enable you to cancel your PMI.
Please contact me today via e-mail (firstname.lastname@example.org) or mobile telephone (909) 262-3434 to discuss your particular case.