In the past, it was quite easy to acquire a loan for a house assuming you had a decent credit rating as the typical down-payment was around 20%. This meant that a bank could loan 80% of the homes value while assuming little risk. If the client were to default on the loan, the lender would have a 20% buffer plus the amount the client has payed into the loan. With the clients home as collateral, the bank could repossess and resell the home with little if any loss.
The Rise of PMI
Nowadays, it is not uncommon for home buyers to put a mere 10%, 5% or even 0% down. This raises concerns to banks as they have less of a buffer in case the client defaults on their loan. To help minimize the risk, often times, these loans will require Private Mortgage Insurance of PMI.
From a mortgage lenders standpoint, a PMI is a wise decision as it helps cut down their risk and the cost is passed onto the client. The average monthly insurance cost is around $50 per month per $100,000 loaned. This is typically added to the overall mortgage payment, making for increasingly large monthly payments. Most homeowners will continue to pay for the PMI even after the balance of their loan has dropped below the original 80% threshold as the payment is just a part of their overall mortgage payment and is often overlooked.
Terminating Your PMI Obligation
In the past, banks could continue to charge the PMI indefinitely over the life of the loan and were under no obligation to inform the client that it was an unnecessary burden. In 1999, the Homeowners Protection Act took effect, which now forces lenders to terminate the PMI at the time that the principal balance of the loan has reached the 78% of original loan amount. What few people know is that upon request of the client, the payments can be ceased upon reaching 80%. Of course, this only applies to those who received a loan after July 1999 when the Homeowners Protection Act came into effect.
The purpose of the PMI was to bridge the burden that smaller down-payments had on banks and thus if the value of your home were to increase, the difference between what is owed on the loan and the overall value of the collateral, your home, can quickly reach 80%. In such cases, a home buyer can request that the PMI be terminated. If you are up on your loan payments and do not represent much risk to the bank, the lenders will typically oblige the request.
A Home Appraisal Can Help
For the average home owner, it is difficult to determine when that 20% mark has been reached and you no longer have the obligation to maintain your PMI. This is where a trained Real Estate Appraiser can help. Appraiser’s have significant training in determining fluctuations in markets and can help you determine if your home has reached the 20% threshold. Faced with an Appraisal from a licensed Real Estate Appraiser, most lenders will acknowledge that the PMI can be terminated. For the low, one time cost of a home Appraisal, you can remove your PMI and enjoy the savings to your monthly payment from that time onward.