Are you paying for Private Mortgage Insurance unnecessarily?

PMI, also known as Private Mortgage Insurance, is a supplemental insurance policy you may pay for to protect your mortgage lender in the event of your default. PMI is provided by private (non-government) companies and is usually required when your loan-to-value ratio — the amount of your mortgage loan divided by the value of your home — is greater than 80 percent. PMI isn’t a bad thing — it allows lenders to accept lower down payments on homes than they would normally be comfortable with. But you may be paying it unnecessarily!

How is PMI calculated?

PMI is calculated by your mortgage lender and covers the lender for a percentage they think will make them whole if they have to sell your property in foreclosure. Your PMI premium is fixed based on plan type (loan-to-value ratio, loan type, loan term, etc.) and is not related to your particular credit history or other individual characteristics. PMI typically amounts to about one-half of one percent of your mortgage amount, according to the Mortgage Bankers Association, and the premium payment is usually rolled into your monthly mortgage payment. On a $200,000 mortgage, you may be paying $1,000 per year for PMI.

How can you eliminate your PMI insurance?

For loans made after July 1999, lenders are required by federal law to automatically cancel PMI when the loan balance falls below 78 percent of your purchase price not when you achieve 22 percent equity, which will happen much more quickly with rising property values. (Certain “higher risk” loans are excluded.) But you have the right to cancel PMI (for loans made after July 1999) once your equity reaches 20 percent, irrespective of the original purchase price.

Keep track of your principal payments. And keep track of what other homes are selling for in your neighborhood. If your loan is under five years old, chances are you haven’t paid down much principal — it’s been mostly interest. But property values in many parts of the country have gone through the roof lately. And that can earn you 20 percent equity even if you haven’t paid down much principal.

When you think you’ve reached 20 percent equity in your home, you can begin the process of freeing yourself from PMI payments! You will need to notify your mortgage lender that you want to cancel PMI payments and you’ll need to submit proof that you have at least 20 percent equity. A state certified appraisal on the appropriate form (URAR񮆼 uniform residential appraisal report for single family homes) is the best proof there is — and most lenders require one before they’ll cancel PMI.

We can help you eliminate PMI!

If you think you’ve got at least 20 percent equity in your home by now, you can call or send me an e-mail and I’ll be happy to schedule an appointment to appraise your home. If you’d like more information about the appraisal process, or if you’d like to order an appraisal for your property to see if you can eliminate your PMI insurance, please visit our website at www.blanchetteappraisal.com. Or you can always contact us. Don’t delay! If you can avoid paying hundreds of dollars a year to insure someone else’s risk, it’s worth starting right away.