Private Mortgage Insurance - Let the Market Eliminate it

Private mortgage insurance can often be dropped with a little help form the market

Most anyone who buys a home today is faced with the prospect of paying private mortgage insurance, otherwise known as PMI. PMI protects the lender against default in cases of mortgages that exceed 80% of a home’s value. In years past, PMI was relatively uncommon, as most lenders required a down payment of at least 20% in order to issue a loan. In today’s market, with high prices, aggressive lenders and few buyers making sizable down payments, PMI is fairly standard in most mortgages.

The average down payment on a home today is about 3%; some buyers make now down payment at all. With mortgages valued at 97-100% of the value of a home, lenders want to hedge their risk a bit, and private mortgage insurance fits the bill, protecting them against default. While PMI is liked by the lenders, it’s hated by borrowers. It’s expensive; the average monthly PMI payment on a median priced US home of $206,000 is $129. That $129 does not contribute to lowering the debt on the house and it isn’t deductible from Federal or state taxes. In short, most buyers find it to be a pain, and would like to avoid paying it, if possible.

Traditionally, the only way to avoid private mortgage insurance was to put down 20% on the house or pay down the loan until the remaining balance was less than 80% of the value of the home. In today’s hot housing market, there is another option - wait a short while. The exploding housing market has driven housing prices to record levels. That’s tough for those who want to buy, but it’s great for those who already own. As the value of their homes go up, the percentage of the value o the home covered by the mortgage goes down. In some markets, prices are increasing so quickly that someone who bought a home a year ago with a minimum down payment may already have enough equity in the home to drop the insurance payment.

In order to drop private mortgage insurance, a professional home appraisal demonstrating the value of the home is required. Most lenders will drop PMI upon seeing the appraisal. Appraisals aren’t free, and typically cost several hundred dollars to have done. Still, for most homeowners, that fee represents only two to four months’ worth of mortgage insurance payments, and most everyone would consider that money well spent.

Homeowners should be aware that some lenders require PMI to be retained for a certain amount of time. Anyone considering having an appraisal done should first check with their lender before spending the money. Owners should also be aware that lenders will not drop mortgage insurance without being asked. Even if your home has tripled in value since you bought it, the PMI payment will remain in place until you provide an appraisal and request that it be dropped.

No one likes to pay for PMI; thanks to an unusually hot real estate market, the rare opportunity to drop it quickly is now available for anyone who wishes to take advantage of it.