When purchasing a home, a 20% down payment is usually the standard. The lender’s risk is often only the remainder between the home value and the sum outstanding on the loan, so the 20% supplies a nice cushion against the costs of foreclosure, reselling the home, and typical value changes on the chance that a purchaser is unable to pay.
The market was taking down payments down to 10, 5 and even 0 percent during the mortgage boom of the mid 2000s. How does a lender handle the added risk of the small down payment? The answer is Private Mortgage Insurance or PMI. PMI guards the lender in the event a borrower is unable to pay on the loan and the market price of the house is lower than the balance of the loan.
Since the payment is lumped into the mortgage monthly payment and many times isn’t even tax deductible, PMI can be expensive to a borrower. It’s lucrative for the lender because they collect the money, and they receive payment if the borrower defaults, contradictory to a piggyback loan where the lender consumes all the damages.
Have equity in your home?
Want a lower payment?
An appraisal from J Alexander Grant Appraisal Group can help you get rid of your PMI.
How homebuyers can prevent paying PMI
With the employment of The Homeowners Protection Act of 1998, on most loans lenders are obligated to automatically cease the PMI when the principal balance of the loan equals 78 percent of the initial loan amount. The law designates that, at the request of the homeowner, the PMI must be released when the principal amount equals just 80 percent. So, smart homeowners can get off the hook ahead of time.
It can take many years to get to the point where the principal is just 20% of the original amount borrowed, so it’s crucial to know how your home has grown in value. After all, every bit of appreciation you’ve accomplished over the years counts towards dismissing PMI. So why should you pay it after your loan balance has dropped below the 80% mark? Even when nationwide trends predict falling home values, be aware that real estate is local. Your neighborhood might not be heeding the national trends and/or your home could have secured equity before things settled down.
A certified, licensed real estate appraiser can help home owners understand just when their home’s equity rises above the 20% point, as it’s a tough thing to know. As appraisers, it’s our job to keep up with the market dynamics of our area. At J Alexander Grant Appraisal Group, we’re masters at analyzing value trends in the Upstate SC, Charlotte Metro area and surrounding areas, and we know when property values have risen or declined. Faced with figures from an appraiser, the mortgage company will usually drop the PMI with little effort. At which time, the homeowner can enjoy the savings from that point on.
Want to learn more about PMI and the Homeowners Protection Act? Click this link:
Homeowners Protection Act (HPA or PMI cancellation act) examination procedures