If you purchased a home with less than 20% down, chances are you are paying for private mortgage insurance (PMI) each month. Added to your principal, interest, tax and insurance (PITI), it can make for a rather hefty monthly payment.
PMI is nothing new, but lenders have been more relentless in insisting on it since the housing meltdown. In short, it's an insurance policy in case you default on your mortgage.
During the Great Recession lenders lost hundreds of billions of dollars because they foreclosed on properties that were worth much less than the amount of the mortgage. When a buyer puts up 20% of the purchase price as a down payment, the lender is fairly sure they can get their money back if things go sour.
Banks got burned
Even if the house has lost some of its value, the thinking goes, the bank should be able to sell it for 80% of its original value. That proved not to be the case, of course, when homes in some markets plunged by 50% or more but that's still the theory.
These days, unless you can make a 20% down payment you're going to be saddled with a PMI payment, which generally runs $40 to $50 per month for each $100,000 of mortgage. PMI for a $200,000 mortgage will cost $80 to $100 a month – on top of your mortgage payment. If you have questionable credit, the PMI could be much higher.
If you are already paying PMI, you can ask your lender to cancel the insurance when you get to the point where you have 20% equity in the property. But expect a vigorous discussion with your lender when you make such a request. It might entail a new appraisal if the lender isn't convinced your home is worth what you think it is.
Not in any rush
Your lender may automatically cancel PMI when your equity reaches 20%, but again, expect your lender to be slow to reach this decision. In fact, some lenders won't automatically cancel your PMI until they think your equity has reached 22%.
Ordinarily, a lender terminates PMI when the loan is scheduled to reach a 20% equity point. But because home values fell nearly everywhere over the last four years, that line has become blurred. If your home value is deemed to have fallen, the lender can classify it as "risky," requiring you to continue to pay PMI.
If you think you have reached the point of 20% equity, your first step should be to ask your lender to cancel the PMI. They might or might not, but it's certainly worth a try. If real estate in your neighborhood has been stable for a couple of years and you've made all your payments on time, it's possible the lender will look kindly upon your request.
If your home has increased in value recently, that can also help you shed PMI. If you bought the house for $150,000 and the house is now worth $175,000, the extra $25,000 in value goes to your equity. If you put $15,000 down and have since paid $8,000 on the principle, the mortgage is just $127,000 on a house worth $175,000 – giving you about 28% equity, more than enough to ditch the PMI.
Another way to get rid of PMI is to refinance your mortgage. If you are convinced you now own 20% of your home but just can't seem to convince your lender, try to find another lender. If you are correct, you should be able to find a loan that will not require you to pay PMI. It worked out for Philip, of Orange Calif.
“Although the refinance process lasted three months, Amerisave finally approved my loan, eliminated PMI (huge savings) and waived the impound account at no cost to me,” Philip wote at ConsumerAffairs. “In summary, Amerisave save me roughly $400 by a combination of better interest rates and elimination of PMI.”
Even if you are a bit shy of 20%, there is a way to drop PMI through refinancing. It's called 80-10-10 financing and it's actually two loans.
You take a first mortgage for 80% of the value and take a second mortgage for 10%. Your equity in the home makes up the remaining 10%.
The drawback are the fees associated with closing two loans, and the fact that the rate on the second mortgage will likely be a little higher. But if it allows you to get rid of PMI years ahead of schedule, you may come out better in the long run.