Mortgage Insurance

Quasi-governmental corporations to insure that a local lender is made whole on its loan if the house is foreclosed upon provide PMI. PMI allows many individuals who would not otherwise qualify to buy a house because of too small a cash down payment to buy a house.

PMI is not inexpensive. There is often an “up front” fee of over $1,000.00 on a typical purchase of a $125,000.00 house. In addition there is a monthly fee that is due along with the mortgage payment of about $55.00 for as long as you have to pay your mortgage… that is until the Homeowner’s Protection Act of 1998 was passed.

Prior to the modification of this law a lender was under no obligation to inform a homeowner that he was no longer required to continue to pay the monthly PMI premium payment. A homeowner qualifies to end his PMI insurance premium payment when the equity value of his home exceeds 20% of its fair market value. This equity growth happens in either one of two ways or a combination of both ways.

Either the value of the home increases so that the amount of the mortgage is less than 80% of the fair market value or the homeowner pays the mortgage balance down so that the mortgage is less than 80% of the fair market value of the home. This can often take several years, especially if a local economy is not prospering.

Prior to the modified law lenders were not required to keep track of this 20% equity figure nor were they required to notify homeowners if they met the requirement to end the payment of the PMI premium. This has now changed. Lenders will be required to notify homeowners when their equity reaches 78% of the original purchase price of the house and the PMI premium payment requirement will terminate.

This sounds like good news but it may take a long time to affect the typical recent homebuyers. For example if you purchased a home for $125,000.00 with a cash down payment of $5,000.00 it would take about 11 years to pay the mortgage balance down to the a $100,000.00 balance to qualify for the termination of the PMI payments.

Lenders are only required to track the amount of the your mortgage balance as it relates to the original purchase price of your home. They are not required to keep track of the fair market value of your home if it increases in value to create a 20% equity position.

If your same $125,000.00 home increases in value over a 5 year period to be worth $136,800.00 then you would also qualify for a termination of PMI premium payments. If you think that your home value has increased so that your loan is less than 80% of the current value of your home the only way you can terminate the PMI payments is to prove that value to your lender.

In order to prove that increased value to your lender you will be required to furnish them with a certified appraisal of your home. This appraisal may cost you between $250.00 and $500.00. If you are confident that the value of your home has increased, the cost of the appraisal will be paid back to you after only 6 months of not paying your PMI insurance premium so in the long run you will be saving money.