When one thinks of “mortgage insurance” some will think of a type of life insurance that if you die, the mortgage on your house is paid off for the benefit of the survivors. Private Mortgage Insurance, known as PMI, is not that at all. PMI is insurance to protect the mortgage lender in the event the borrower defaults. PMI is usually required on conventional home loans for which the down payment is less than 20 percent.
Without PMI, the risk to the lender would be higher, and lenders would not be as willing to commit as many funds toward low down payment programs. With PMI, conventional loan programs are available to buyers with as little as 3 percent down.
In rapidly appreciating markets, buying a home with as little down payment as possible makes a lot of sense. When average home prices rise 20 percent in a year, and you’re trying to save for a 20 percent down payment, you go backwards pretty quickly. In other words, you just can’t “out-save” the price growth in the housing market we have now. In a market like this one, if you can afford the monthly payment, you can purchase a home as soon as you have a 5 percent down payment, thanks to PMI.
Private Mortgage Insurance is not free. Mortgage lenders have access to different companies that underwrite PMI. PMI can be paid up front, monthly or a combination of both. PMI can also be built into the interest rate. The bottom line is that it costs a little more to be able to buy with a low down payment.
Now for the good news. In an appreciating market, once the loan-to-value ratios fall within certain guidelines, the expense of PMI can be removed. If you think you can meet the guidelines, the first step is to contact your current mortgage lender. Here are the general guidelines:
As you pay on your mortgage, the loan balance goes down a little each month. Once it is less than 80 percent of the original value, you can request the PMI be removed. If you have been paying extra towards your mortgage balance, it might reach that level quicker than you think. You can also analyze whether or not it would be good to pay the balance down today, to a level where it is less than 80 percent.
When the loan balance has reached 78 percent of the original value, PMI is supposed to be removed automatically. If you think you have reached this level and PMI has not been removed be sure to contact your lender.
If you think the value of your home has gone up enough in the last two years that its current value places the loan at 80 percent loan-to-value or less, you can request the PMI be removed. The lender would likely require an appraisal be done. Again, check with your current lender.
Other ways to remove PMI
Pay down your loan balance. If you have been making extra payments towards the principal, the loan might be paid down enough to qualify for PMI removal.
If you improve your home, you might be able to get an appraisal showing that your home qualifies to have the PMI removed.
If values have gone up and rates have gone down, you might consider refinancing. You need to consider the costs of refinancing and the fact you are starting over on a new loan.
Get a Mortgage Recast of your loan. Often a lender will do a Recast. This can sometimes be done with fewer expenses of a refinance and leaves the remaining years on the loan in place.
Replace the current mortgage with an open-ended Home Equity Line of Credit (HELOC). HELOCS don’t require mortgage insurance but don’t have a fixed interest rate.
Be sure to consult your Mortgage Loan Officer and other financial advisors and work out a plan that is just right for you.
By Duane Duggan. Duane has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients. He has been awarded two of the highest honors bestowed by RE/MAX International: The Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail DuaneDuggan@boulderco.com, call 303.441.5611 or visit boulderco.com.