First things first, what is PMI anyway?
PMI or Private Mortgage Insurance is a type of mortgage insurance designed specifically to protect the lender in case of default. It is paid as an upfront cost, a monthly premium, or a combination of the two, and your lender will tell you all of the options and fees when you receive your loan approval and your Loan Estimate and Closing Disclosure documents for review.They take into account risk factors like your credit, your debt-to-income ratio, zip code, and type of property you are purchasing. All together, it can sometimes add hundreds of dollars to your monthly payment.
PMI-A Brief History
In the late 1920s there were over fifty mortgage insurance companies in the US, and they were flourishing. But they were riddled with issues, conflicts of interest, high risk to capital and as a result, almost all of them failed during the Great Depression. Then, in 1934, FHA (Federal Housing Authority) was born as a way to restore confidence in mortgage investments and make it easier for the consumers to obtain a mortgage because up until this time, you had to have almost 50% and could only finance a home for about 5 years. Can you imagine?? Initially, lenders did not trust FHA but attitudes gradually changed, and in the first decade after World War II, confidence had returned to the market and FHA became an important part of the system. The way was clear for private mortgage insurance to return to the market for good. And so in 1954 the Mortgage Guaranty Insurance Company stepped in, and assumed the risk on the first 20% of a home loan and opened up the market to 5%, 10% and 15% down mortgage products.
Back to PMI and your Monthly Payment
If you put less than 20% down on your loan, PMI has been calculated and added to your mortgage. The good part of PMI for you is that it makes lenders more willing to loan you the money in the first place, because someone else is assuming the risk. Without PMI, many of us would not be able to purchase a home until we had saved a 20% down payment. Prior to 1954 that was the primary way to buy a home and while it is better than needing 50% to put down, it still keeps home ownership out of reach for many of today’s consumers.
So When Does it Go Away?
Twenty percent is the magic number when it comes to PMI. It’s the sweet spot we have to get to in order to remove PMI and start saving money.
Alan Kennedy, Lender, Vice-President and Producing Branch Manager at Bank South, said that PMI automatically drops off when the loan amount gets to 78% of the original sales price. But what if you believe your home value has risen already, and you don’t want to wait it out?
“People can watch market values and request it be removed if high appreciation rates occur and then prove that with a new appraisal to show the loan is at 80% LTV (loan to value) prior to actually paying the loan down by 78-80%,” said Kennedy.
The market is strong in most areas and housing prices have gone up. This means you might have 20% equity in your house due to market conditions. If you do, then there is no reason to continue to pay PMI, right?
Let’s Talk Equity
Equity is the amount of money your house is worth minus what you owe on the mortgage. If you paid $100,000 for your house and you owe $90,000, then you have 10% equity. The bank still assumes that your house is worth $100,000 based on original sales price so they will keep taking the PMI until you reach the sweet spot of 80/20. But what if your neighbor just sold for $125,000 and your house might be worth that too? If your house is worth $125,000 and you owe $90,000, then you are within the 20% equity mark and you could start the process to remove that PMI from your mortgage.
Not all loans, however, are created equal. If you have an FHA loan from within the last 3 years, PMI stays with the FHA loan for the life of the loan. There is no negating the PMI with this, the only way out is to refinance. Some loans require two years of PMI regardless of value, or may require a higher LTV if you are under 5 years into your loan. Some loan products may have had you pay all of the PMI up front at the closing table.
“To remove PMI from an FHA loan originated in the last three years,” said Kennedy, “one needs to have 20% equity in the property and qualify for a conventional loan.”
Of course all other lending criteria applies too but it might make sense to refinance your FHA loan to a conventional. You can reach Alan at 706-206-0476 to find out more and what makes the best sense for you.
We are not appraisers but we know what our current market conditions are. If you want to challenge your current PMI, we can let you know what your house would likely sell for in today’s market. This will give you a good indicator as to whether you are close to the goal or have surpassed it. The next step is to call your lender and ask them the procedure to remove PMI. They will require an appraisal, and that will be an out of pocket expense that will cost about $400, but if you are right, you could end up saving thousands!