Your Mortgage : Why Pay Mortgage Insurance Unnecessarily? : Finance: You can arrange to drop your policy if you have enough equity in your house and a good payment record.
Want to cut your mortgage payment by $300 or perhaps even more than $600 a year without having to pay a penny in refinancing charges? If the answer is yes, see if you can remove the private mortgage insurance, or PMI, from your home loan.
Don’t confuse private mortgage insurance with insurance polices that will pay off your loan if you die: PMI protects the lender’s interest in your property, while the other type of insurance benefits your spouse or heirs.
Not everyone has private mortgage insurance. Lenders usually only require borrowers to buy the policies if the down payment on the home is less than 20% of the home’s purchase price. If the borrower defaults, the insurer will reimburse the lender for at least part of its losses.
Although the policy protects the lender’s interest in the property, you’re the one who pays the bill. The cost depends primarily on the size of your loan, but typically ranges from $25 to $50 a month.
Payment is usually made into an impound account on a monthly basis, much like the account used to accumulate funds for your property-tax payments. Since the cost of the insurance is factored into your monthly mortgage payment, it’s easy to forget that you’re paying for the policy.
But forgetting about your PMI can be a costly mistake. That’s because most lenders will allow you to eliminate the coverage once you have established at least a 20% equity stake in the house.
So, if you purchased a $100,000-home several years ago and borrowed $90,000 to do it, you have the right to cancel the insurance if the outstanding balance has been reduced to $80,000 or less.
Perhaps more important, you may also be able to cancel your PMI if your home has risen sharply in value over the past few years--as prices in most Southland markets have.
For example, say you bought a $100,000 home in 1987 with a 10% down payment and borrowed the remaining $90,000. As a rule of thumb, annual PMI payments are about one-third of 1% of the loan’s outstanding balance, which means you’re paying about $300 a year in premiums.
If the property has gone up 12% in value over each of the past two years, it’s now worth about $125,000 and your equity stake--the difference between what the property is worth now and how much you owe--is about $35,000. That’s a 30% stake, a figure that may make you eligible to drop the coverage and save $300 a year.
“When you’re talking about that kind of money, it’s certainly worth seeing whether you’re eligible to drop your private mortgage insurance,” said Pete Mills, manager of research and policy analysis for the California Assn. of Realtors.
You can find out whether you’re paying PMI by checking your original loan documents, the settlement statement you received when you closed escrow, or by looking at your monthly statement. If you’re still not sure, ask your lender.
If you’re paying for PMI but don’t think you need it any more, ask your lender how you should go about having it removed.
A handful of lenders will cancel the PMI simply after you make a phone call and the lender verifies that you have at least a 20% equity stake in the property. Others will cancel it if you furnish a letter from one or two realtors estimating the current value of your home.
Most, however, will insist that you have an appraisal of your property’s current value. It’s usually best to use an appraiser recommended by the institution itself: You’ll have to pay the $150 to $300 cost.
A few lenders simply refuse to waive PMI, in which case you’ll be stuck paying the premiums until you either sell the home or refinance it.
Ask the lender whether your home loan has been sold to either the Federal National Mortgage Assn. or the Federal Home Loan Mortgage Corp., two government-chartered agencies that purchase nearly 2 million loans a year from lending institutions.
If either of these agencies have purchased your loan, you’re in luck: Both generally require lenders to cancel the insurance if certain conditions are met.
Bonnie O’Dell, a spokesperson for Fannie Mae, said her agency requires lenders to cancel the insurance if the borrower requests it, the loan is at least one year old and the homeowner has a minimum 20% equity stake. The lender, however, has the option of requiring the borrower to pay for an appraisal.
Freddie Mac isn’t quite as generous. Borrowers must provide an appraisal showing that they have a 25% stake in their property if the loan is less than five years old, and the agency won’t consider cancellation if the loan isn’t at least two years old.
Freddie Mac requires the borrower to have only a 20% stake if the loan is more than five years old, said D. James Croft, an executive vice president with the agency.
And one other note:
Virtually all lenders require that borrowers have a good payment record before they’ll cancel the insurance.
“It’s up to the lender to decide what a good payment record is, but it usually means that you haven’t had any late payments in the last 12 or maybe even 24 months,” Mills at CAR said.
