At first glance, the date of July 29 does not seem to be one of the dates that would stir a lot of interest. When I think of late July in Mississippi, something about the “dog days of summer” comes to mind. However, it is an important date if you’re a homeowner and if you’re paying private mortgage insurance (PMI) in your monthly house payment.
The reason is because on July 29, the “Home Owner Protection Act,” dated July 29 of a year ago, becomes effective. I wrote on this subject several months ago so an update primer on this national legislation is now timely and appropriate.
This new bill requires lenders to notify borrowers (homeowners), on an annual basis, that PMI removal is possible. For loans made after July 29, 1999, by the way, the cancellation of PMI is automatic. This article is slanted toward loans that were originated before July 29, 1999. Those loan applications now in the pipeline that will close after July 29 will have more liberal cancellation terms.
Basically PMI (private mortgage insurance) provides a lender with protection against loss (via default) so that the lender can make a higher ratio loan. If, for example, you pay 5% down, the PMI company will insure the top 10% of the loan. If you go into default, the lender will protect for the top 10% of his loan so that, if $100,000 was the loan amount, the property would have to have declined in value below $90,000 in order for the lender to be in a loss situation.
Typically, PMI is required for a sale if there is less than a 20% down payment. In other words, if the borrower is paying 20% down or more, PMI isn’t applicable anyway.
The cost of PMI varies but is typically 0.5% (1/2 of 1%) of the loan for Year 1 with decreasing payment over time. According to the Mortgage Insurance Companies of America, an industry trade group, over 1 million homeowners annually get Private Mortgage Insurance (PMI), as required by the lender.
The cost to a homeowner of PMI varies, depending on down payment, type loan and amount of coverage. Here’s a typical example: A house costs $119,000. The buyer is putting down 10% and getting a 30-year fixed-rate mortgage. In this case (with 10% down) the PMI premium would be around $45 per-month. If the buyers were putting only a 5% down payment, the premium would increase to $70 per-month.
So how would you go about, after July 29, getting your PMI canceled? PMI cancellation is done by the loan servicers. After July 29 borrowers will be receiving notices giving them their servicer’s name, address and phone number. Don’t lose this bit of information as these are the folks you’ll need to contact for consideration of cancellation of this monthly charge.
So what situation might “qualify” me to have my PMI canceled? Good question! Generally if the loan balance is 80% of the original value and if your mortgage payments are not in arrears (are up-to-date) and if the lender is satisfied that the property has not declined in value, then you’re a prime candidate to have this monthly payment dropped altogether.
How do you “prove” you’ve got 20% equity in your property? A qualified appraiser’s report would be the best evidence. However, a word of caution: don’t go flying off hiring an appraiser until you’ve first talked (after July 29, 1999) to the servicer.
The Bottomline: There are hundreds, perhaps thousands, of Mississippi homeowners who, after July 29, will no longer be required to pay this monthly premium called “private mortgage insurance.” Yet, sadly, many will continue to do so at rates of $50 and more and every month. With savings of that type, the money invested in an appraisal (once approved by the servicer) would be returned in a handful of months, and , thereafter, homeowners can spend that money on their children, their grandchildren, their church, their favorite charity, their favorite political candidate, or even on themselves!
Jerry G. Brewer, SRA, ALC, is a general certified appraiser with Brewer Appraisal Service in Senatobia.