October 1998 Sincerely Sire Newsletter
Getting PMI Removed
I have received many calls recently regarding getting PMI (Private Mortgage Insurance) removed from home loans so I thought I would pass this along to you. This is from the September 1998, Today’s Realtor published by the National Association of Realtors:
President Signs Automatic
Cancellation of PMI
In a major victory for homeowners and real estate, President Clinton signed into law last month legislation backed by NAR requiring lenders to start automatic cancellation of private mortgage insurance when a borrower’s home equity reaches 22 percent. The law, which goes into effect July 29, 1999, won’t preempt any state statues in effect before Jan. 2, 1998. It also gives the force of law to a homeowner’s existing right to cancel PMI when equity reaches 20 percent.
My interpretation of the above is as follows: Starting July 29 once a borrower has actually paid his loan down to where it is 78% of the original purchase price of the home, the bank must automatically remove your PMI insurance without you having to do anything. In other words I guess they’re going to set their computers or something so that the PMI will automatically cease at the 22% equity level.
In a market where home prices are stable or going down, this new law could be significant. But in a market like we’re in now, where prices are going up, it doesn’t mean much because by getting an appraisal of your home, and factoring in appreciation, you can reach the necessary equity position to get your PMI removed a heck of a lot faster than by actually paying your mortgage down.
For instance, (I just did some quick calculations on my HP 12C) with a purchase price of $250,000 and a 10% down payment, the new loan amount is $225,000. At an interest rate of 6.75% on a 30 year loan the payment for principal and interest is $1459.35. Making the normal monthly installments on this loan, it would take the borrower over 9 years to pay the equity down to 78% of the original purchase price. (After 9 years the borrower would have paid $128,931.17 in interest and $28,678.63 in principal.) And, of course, with only 5% down, which many buyers are doing today, it would take even longer to reach the 22% equity level.
On the other hand, in an escalating market, like we're in now, where prices are going up 10 or 20 percent or even more per year, you can reach the necessary equity level to get your PMI removed in a matter of just a few years, based upon appreciation and an appraisal of your home.
Another question comes to mind as I write this. I wonder what happens if home prices are coming down? I mean what happens if you have paid off the necessary principal to reach the 22% equity position to get your PMI removed (based on the original purchase price), but prices have dropped, say, 10%. I wonder if the lender could do their own appraisal and say “no” to the PMI removal. I’ll have to check this out and get back to you.
More significant in this new legislation is the part that says, “It also gives the force of law to a homeowner’s existing right to cancel PMI when equity reaches 20%.” Although I haven’t heard of lenders giving homeowners a particularly hard time when it comes to PMI removal, it’s nice to know that you’ve got a law that says they have to do it when you reach the necessary equity position, whether it be by actually paying the principal down, or by factoring in appreciation based upon an appraisal of your home.
Most of the phone calls to me regarding PMI removal go like this. “Hey Joe, here’s the house I own, check the “comps” for me and let me know if I should spring for the cost of an appraisal (about $300.) in order to get my PMI removed. If the value isn’t there yet I don’t want to hassle it or spend the $300. either.” I then pull up the comparable sales and give you a ball park number to base your decision on. So, anyway, feel free to call or e-mail me if I can help you.