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you remove your PMI! Read this info below then
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How to remove
PMI
When you think your home has appreciated
to the point where you have enough equity to
cancel your monthly PMI (Private Mortgage Insurance)
payments - what do you do next?
You're not the only person to ask
this question. With the advent of 95%,
97%, and even 100% purchases, more and more people
are putting less money down and counting on future
appreciation. That's about 1.5 Million
homeowners in 1999.
Keep in mind that you need 20%
equity to proceed. There is a quick way
to do this calculation:
Multiply your current loan balance
by 1.25. Your home has to be worth at least
this much to legally get rid of the $40 to $120
premiums you pay every month.
The 20% in equity can be earned
by paying down the mortgage over time, appreciation,
or home improvement.
Or of course by refinancing your loan. Then
the LTV (and PMI amount) is based solely on the
appraised value and new loan amount, which makes
a lot of sense if rates are lower now than your
current rate, or if you PMI amount drops enough.
Or you can consider re-structuring your loan
so you will not have PMI.
Why does PMI exist?
Lenders have determined that those with more
than 20% equity are less likely to default on
the mortgage. PMI allows homeowners to
purchase a home with less than 20% down by insuring
the lender against default.
If not for PMI, everyone would
be required to put at least 20% down on the mortgage.
What has changed, I hear
it's hard to get rid of PMI?
The Private Mortgage Insurance
act took effect in July of 1999. It gives
homeowners a number of rights.
1) Lenders have to give you a written
statement explaining that you have PMI and when
you'll be allowed to cancel it.
2) The lender must allow you to cancel PMI when
your equity is 22% or more.
3) And you can ask for permission once your equity
reaches 20%.
The new law only affects new mortgages funded
after July, 1999, but Fannie Mae and Freddie
Mac have said they will apply the new rules to
the older loans.
First Step - what is my
home worth?
For a start, you can find online
home valuation estimations on the web and get
a rough sense of what your home is worth. But
sometimes the web sites can be off the mark. And
most importantly, these valuations are not acceptable
for PMI cancellation purposes by the largest
owners of PMI-insured mortgages - Fannie Mae
and Freddie Mac.
Homeowners can also contact a local
appraiser and ask whether they do "PMI Cancellation
Consultations." Some local appraisers will
do a quick check for you for a small fee. BUT,
that will only tell you if you're in the ballpark. The
good news is that most of these appraisers will
credit that small fee towards the full appraisal
you'll need to cancel PMI.
I think my home is worth
enough, what do I do next?
To qualify for the cancellation,
you'll have to demonstrate to the lender that
the property is as valuable as you think it is.
Don't hire someone and pay for
a full appraisal before contacting the lender
that services your loan.
Under Fannie Mae and Freddie Mac
rules, it is the lender-servicer, not the homeowner,
who much choose the appraiser. If you pay
$300 for an appraiser, you're gambling that the
servicer will accept that appraisal. Fannie
Mae requires that all of it's PMI Appraisals
be ordered by its servicers from it's network
of approved appraisers.
Request in writing to your current
lender-servicer that the PMI be cancelled, and
ask them to order an appraisal to verify the
equity if you are depending on appreciation or
home improvement to earn the equity. If
you have paid on the mortgage to such a point
that you have 20% in equity, they can cancel
without an appraisal in some cases.
When can't I cancel PMI?
The new laws apply to loans funded
after July of 1999. However, Fannie Mae
and Freddie Mac have said they would honor the
new laws on the old loans. However, you
need to review your loan document with your lender,
some lenders require 25% equity.
FHA loans are not required to drop PMI - if you
have an FHA loan - expect to keep paying PMI
for the life of the loan. Refinancing may
be the best option for you.
Payment history is very important. If you
have a payment more than 30 days late in the
past year, or a payment more than 60 days late
in the past two years, the lender is not required
to drop PMI.
If you have a second mortgage or
Home Equity Loan that makes the LTV of the first
and second mortgage more than 80%, the lender
is not required to drop the PMI.
To Recap:
1) Determine the estimated value of your home,
and make sure it's enough to qualify.
2) Contact the lender to whom you
send your payments each month. Ask the
lender to order an appraisal to determine market
value. Keep all notes in writing.
3) You need to keep an eye on your
equity to determine when you can get rid of PMI,
you are the person that cares the most about
eliminating PMI.
4) Consider applying the extra
money you've saved towards the mortgage to pay
the loan down faster.
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