Private Mortgage Insurance (PMI), is a tool used by many individuals to purchase a home with a down payment of less than twenty percent. When you are required to pay for PMI, a question you should ask yourself is, “Is it necessary to place my money into escrow, or should I instead keep that money in my pocket?”
Each month, like most hopeful homeowners, you make a mortgage payment, dutifully without much thought. Have you looked into how that mortgage payment is broken down? In most cases, only a portion of that mortgage payment is used to pay the balance of your loan and the interest, the rest is placed in an account known as escrow. That escrow is used to pay the real estate tax and various insurances for the home, including hazard, homeowners, PMI, flood, and etc.
When you purchase a home using conventional financing, but with less than twenty percent down, you normally must pay PMI. A Private Mortgage Insurance protects a lender or other investor against possible loss when a borrower stops paying their mortgage, for whatever reason. Many times, a homeowner mistakenly continues paying for the insurance year after year, never realizing they no longer need to pay it. This results in the homeowner possibly paying thousands of dollars in useless premiums for an insurance that is not necessary.
What many homeowners do not know is that when you reach twenty percent equity in a home, either by appreciation, improvements you have made, or through paying down of the mortgage’s principal balance (normally, a combination of these three), you could force a lender to eliminate the PMI. This can be done by requesting in writing a cancellation of PMI. You may need to fill out a brief form and supply the lender adequate proof of acceptable equity in excess of twenty percent.
In nearly all cases, that acceptable proof is an appraisal, which is state certified. The Homeowners Protection Act of 1998, often referred to as the PMI Cancellation Act, requires a servicing lender to make their borrowers aware of any PMI they may be paying and what requirements must be met to cancel it. Luckily, there is no need for you to wait until the lender notifies you. When you have acquired twenty percent equity or more, you will most likely be able to cancel it immediately.
PMI may not be required in every instance. The common rule is when a buyer puts down less than twenty percent toward the purchase of a single family dwelling, mortgage insurance is required. However, in most cases when the down payment equals twenty percent or more, PMI is not required. A recent surge in mortgage insurance to due to a popular practice of not putting twenty percent down to purchase a home, whether this is wise or not. The Mortgage Insurance Corporation of America (MICA) claims the use of PMI allowed more than 15,000,000 Americans the ability to purchase a home with less than twenty percent down over the last forty years.
PMI will not protect a homeowner in case of loss; therefore, even though a home purchaser is required to pay for the insurance, they will in all likelihood never deal with the PMI company. Any dealings with PMI are normally handled by the mortgage company or lender. Also, the lender or another purchaser of your mortgage has the final decision regarding PMI. That means that they determine how much or if, a homeowner has enough built up equity to eliminate the PMI. Accordingly, it is wise to remain in communications with your lender or the institution that currently services your mortgage regarding the requirements to cancel the PMI.
Once you have built up a twenty percent equity in your single family residence, which is an owner occupied home, (some financial institutions may require twenty-five percent, check the loan document) you may initiate the steps to cancel the PMI. Step number one is to contact your lender (where you send your mortgage). This might not be who you borrowed the money from originally. Frequently, mortgage companies buy or sell the loan several times over the life of the loan. Whenever your loan changes hands, it is advised to request in writing PMI cancellation procedures. Each institution can have different requirements.
Ultimately, it is up to the current loan holder whether or not they will allow cancellation of PMI. Several factors could lead the mortgage company to require continued payment, such as payment history and credit worthiness.
Although PMI might have been beneficial to your purchase of your home with a minimum down payment, there comes a time when it no longer provides any benefit. However, no one will tell you to cancel it. Therefore, it is to your benefit to keep your mortgage current and keep track of your equity.
The best financial advisor you have is you. Even small, unnecessary expenditures should be eliminated when possible. Keeping an unnecessary insurance, leaves you and your family with less money in the budget.
Many lenders will require real estate appraisals by state certified appraisers as essential proof to cancel an unnecessary PMI. True Value Appraisal, Inc. is your friend in the business and we specialize in assisting our friends eliminate unwanted and unnecessary PMI.
Our initial consultation is free and without obligation. We will assist you in determining whether or not you have adequate equity to eliminate your PMI.
Give our office a call today when you have questions regarding PMI or need an appraisal for any reason. Read our Testimonials to see what others think about the services they received from Pierre Jacques and his team of state certified appraisers at True Value Appraisal, Inc.
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