Lew Sichelman MarketWatch
Updated Jan. 18, 2006 11:59 p.m. ET
This article originally ran on Jan. 18, 2006
One issue on people's minds: How can I get rid of the private mortgage insurance that I have to pay on my home loan?
Question: There are a few things I do not understand about private mortgage insurance. The most important is, can the borrower initiate the elimination of PMI? I assume the mortgage holder must approve. I purchased a condominium in Sherman Oaks, Calif. for $290,000 in 2001 with $125,000 down and a 30-year fixed-rate first mortgage for $165,000 in 2001. The property is worth $550,000 or more I am told. I would like to eliminate the PMI if my lender will approve (if necessary). Who should I contact to get the ball rolling? It is very hard to get my lender on the phone to ask them anything.
Answer: You are correct on both counts. Yes, you have to initiate the process (at least until the loan's balance is paid down to 78% of the home's value at the time it was purchased). And yes, the lender has to approve, but only until an 80% loan-to-value ratio is reached. Then, the Homeowners Protection Act of 1998 kicks in, requiring lenders to automatically cancel coverage if you ask for it.
However, what puzzles me is why you have mortgage insurance in the first place. It is usually only required of borrowers who put down less than 20% of the loan amount, because it has been shown that those folks are more likely to go into default than those who have more skin in the game. By my calculation, you put up more than 43% of the loan amount. If that's the case, your down payment was more than enough to eliminate the need for PMI.
But back to your question. Many people look at mortgage insurance as an unnecessary expense, but I look at it as more of a necessary evil. Nearly 12 million families in the last 12 months alone have become homeowners thanks to PMI.
No, it isn't cheap. But someone paying $100 or so a month extra for mortgage insurance can purchase a house 10 years sooner than they might have otherwise and with as little as 3% down -- or even less for some qualified borrowers. Otherwise, they'd either have to wait until they scraped together the necessary 20% down payment or perhaps take out an even more expensive second mortgage.
Lenders accept the insurance as a substitute for the part of the down payment that is missing. The less money the borrower puts up, the more expensive the coverage. And worse, perhaps, is the fact that even though you pay the premium, the insurance protects the lender in case you default on the loan.
People used to have a devil of a time getting lenders to drop coverage. But that changed seven years ago. You must be up-to-date on your house payments and have no other loans on the house. Also, the lender must be satisfied the property's value has not declined. But otherwise, coverage must be canceled.
Under the law, the lender must cancel coverage at the borrower's request when the loan is paid down to 80% of the property's original value. But if you forget to ask, policies must be terminated automatically when the loan balance reaches 78% of the home's value at the time it was purchased.
Again, your payments must be current. But even if they aren't, coverage must be dropped when you catch up. And you don't have to lift a finger. Cancellation is supposed to be automatic.
However, under rules adopted by Fannie Mae and Freddie Mac, the two giant financial institutions which keep the vaults of many local lenders fresh with cash for home loans, you can end coverage based on your home's current value as opposed to its original value. That's a huge difference.
Say you put down 5% on a $200,000 house with a 6% 30-year fixed-rate
mortgage. If you simply sit on your duff and do nothing, your PMI coverage will end automatically in 11 years.
But if your place is appreciating in value at an annual rate of, say, 5%, you'd build up enough equity to meet Fannie and Freddie's rules after just 36 months, according to United Guaranty, one of the nation's seven mortgage insurance companies. If you happen to live in a place where housing is really hot and prices are rising at 10%, you'd reach the cancellation point in a mere 20 months.
Of course, the two secondary market institutions have their own set of rules by which lenders and their customers must abide.
You can't cancel coverage until your loan is at least two years old unless you've made significant improvements to the property. If the loan is between two and five years old, you must have paid the loan down to 75% of current value. But if yours is a "seasoned" mortgage that has been on the books for at least 60 months, your loan-to-value ratio need only be 80%.
In addition, you must have a good payment record, with no payment more than 30 days late over the last 12 months and none more than 60 days late within the last 24 months.
Not every lender abides by Fannie Mae and Freddie Mac's rules. The two government-sponsored enterprises touch only about half of the all loans originated. But they are so powerful that most lenders follow their edicts, especially if they intend to sell their loans sometime in the future.
Chances are that lenders who don't meet the GSEs' requirements are more strict about canceling coverage. But some could be more liberal.
The rules may seem a little daunting, but they are fairly cut and dried. First, you'll want to make sure your loan is at least two years old. If it isn't, PMI can't be released, no matter how much your house is worth now -- at least not unless the increase is attributable to a structural improvement you've made to the place; say, a finished basement, for example, or an addition.
Next, make sure you have a good payment record. After that, you'll want to make sure you have enough equity. If you don't have a good handle on that, spend $25 or so for an automated valuation, a kind of shorthand electronic appraisal that will give you a ballpark figure. Then, if it looks like you have enough equity to satisfy the rules, you can proceed with a full-blown, $300-$350 appraisal. But don't rush out and pay for an appraisal yourself. The lender will order one your behalf.
Mortgage Insurance Cos. of America, the trade group for private insurers, has a helpful Web site at www.privatemi.com that outlines the steps to follow for the most painless cancellation process, including sample letters you can use to get the ball started. Go to the MICA site.
Question: I have not been successful in shedding the private mortgage insurance on my loan, which is with CalHFA. I have an excellent payment record and have owned my home for over three years. I'm a teacher and could really benefit from dropping coverage. Please help. Patrick Berry.
Answer: I'm sure you could use the extra money. Unfortunately, CalHFA is one of those lenders that plays this game by another set of rules. The Federal Housing Administration is another.
As far as CalHFA is concerned, once the mortgage is at least two years old and has been paid down (or there has been an increase in value of the home) to create a loan-to-value of 80% or less, the borrower can cancel coverage. If you meet these two requirements, you can request cancellation by contacting CalHFA's loan servicing department at 916-323-2022.
FHA borrowers can't request that insurance be dropped. But coverage is automatically canceled only on loans closed of or after Jan. 1, 2001 when the balance has fallen to 78% of the initial sales price or original appraised value, whichever is lower.