a decent credit rating, any potential home buyer can secure a loan for
a house. Why? Because these transactions are secured by a very valuable
asset: the home itself. If a borrower defaults on a loan, the risk for
the lender is often only the difference between the value of the home
and the amount outstanding on the loan, less the amount it costs them
to foreclose and resell the property.
this reason, lenders are very wary of lending more than a certain
percentage of a home’s value. Traditionally, this has been 80 percent.
The cushion this provides the lender helps ensure that their losses
from loan defaults are kept to a minimum.
recent years, however, it has become increasingly more common to see
home buyers using down payments of 10, 5 or even 0 percent. Naturally,
loaning this much presents the lenders with a lot more risk. To offset
this risk, these transactions often require Private Mortgage Insurance
or PMI. This supplemental policy protects the lender in case a borrower
defaults on the loan, and the value of the house is lower than the loan
has been a large money-maker for the mortgage lenders. The amount of
the insurance often $40-$50 per month for a $100,000 house is commonly
rolled into the mortgage payment. Given the size of the overall
payment, this additional fee is often overlooked. Homeowners continue
to pay the PMI even after their loan balance has dropped below the
original 80 percent threshold. This occurs naturally, of course, as the
home owner pays down the principal on the loan. On a typical 30-year
loan, however, it can take many years to reach that point.
recently lenders were under no obligation to tell home owners when they
had reached a point where the PMI can be dropped. That all changed in
1999, when the Homeowners Protection Act took effect. In most cases,
this law now obligates lenders to terminate the PMI when the principal
balance of the loan reaches 78 percent of the original loan amount.
Savvy homeowners can get off the hook a little earlier. The law
stipulates that, upon request of the home owner, the PMI must be dropped when the principal amount reaches only 80 percent!
is important to note that this law only applies to home loans whether
first time or refinances that closed after July, 1999. Also certain
other conditions must be met, such as being current on the loan
payments. Buyers that purchased before July 1999 can also have their
PMI removed, but they must initiate the process and though the lender
is under no obligation to do so, most will.
course, there is another way that home owners equity can reach beyond
the 80/20 percent ratio. Many areas of the United States have seen
significant gains in the value of real estate over the past decade. In
fact, certain areas have seen appreciation levels of 100 percent or
more. Even those people living in areas with more modest gains may find
that the value of their property has quickly grown to the point where
the amount of principal they owe on their loan is less than 80 percent
of the homes current value. Again, in these cases, the lenders are
under no legal obligation to remove the PMI. In most cases, however, as
long as the home owner has been prompt on their loan payments and don’t
represent an exceptional risk, the lenders will agree to remove the
hardest thing for most home owners to know is just when does their home
equity rise above this magical 20 percent point? A certified, licensed
real estate appraiser can certainly help. It is an appraisers job to
know the market dynamics of their area. They know when property values
have risen or declined. Many appraisers offer specific services to help
customers find the value of their homes and remove PMI payments. Faced
with this data, the mortgage company will most often eliminate the PMI
with little trouble. The savings from dropping the PMI pays for the
appraisal in a matter of months. At which time, the home owner can
enjoy the savings from that point on.