Every month, if you are like most of us, you dutifully make your mortgage payment. Have you ever really given any serious consideration to exactly what makes up your monthly payment? For most of us, the mortgage payment not only pays off the mortgage loan, but a portion also gets put into an escrow account to pay for real estate taxes and a variety of different types of insurance (homeowners, hazard, flood, PMI etc.). If you purchased your home with conventional financing and put down (payment) less than 20% it is quite likely that you are paying for private mortgage insurance. Private mortgage insurance protects the mortgage lender or investor against loss if a borrower stops making payments, and typically costs the borrower between $25 to $100 a month. Some homeowners pay this insurance for many years after it is no longer needed and could end up paying an extra $5000 or even $10,000 or more in useless insurance premiums.
Here is the good part that many homeowners are clueless about – Once you have reached 20% equity in your home by appreciation, improvements made to the home or paying down the principal balance of the mortgage (or any combination of the three), you can force the lender to cancel the private mortgage insurance. All you have to do is request in writing that the private mortgage insurance be canceled (most lenders have a brief form which must be filled out) and provide the lender with proof of sufficient (over 20%) equity. In most cases the necessary proof is a (state) certified appraisal on the appropriate form (URAR-1004 uniform residential appraisal report for single family homes). Recent legislation (the Homeowners Protection Act) requires servicing lenders to make homeowners aware of the existence of any PMI Insurance they might be paying for and the requirements necessary to have it cancelled. Fortunately, though, you don’t have to wait for the lenders notification to rid yourself of private mortgage insurance. If you have sufficient (20%) equity, you can probably in most cases cancel it almost immediately.
Private mortgage insurance is not required in all instances. The general rule is that if a homeowner has put down less than 20% down on a home purchase (single family), mortgage insurance will be required. Homes purchased with a down payment of at least 20% should have enough equity to cover any potential losses by the lender, so mortgage insurance is generally not required. There has been a surge in the mortgage insurance industry because of the popularity of purchasing homes with less than 20% down. MICA claims that because of mortgage insurance making up for the down payment difference, 15 million Americans have been able to purchase homes over the past four decades.
Mortgage insurance does not protect a homeowner against loss, so a borrower that is required to purchase it will probably never deal with the mortgage insurance company. All dealings concerning mortgage insurance are usually handled by the lender. It is also the lender (or the eventual purchaser of your mortgage loan, if any) who has the ultimate decision when it comes to mortgage insurance, meaning how much and when the homeowner has built up enough equity in the property to drop the insurance. Therefore one must remain in contact with the lending institution which services their mortgage (collects the monthly payments) to inquire about this type of insurance and the requirements necessary to have it cancelled.
After a homeowner has built up 20% equity for a single family owner occupied residence (a few banks may require as much as 25% equity – check your loan documents to ascertain what applies in your situation). in the house, they may begin to initiate steps towards canceling the mortgage insurance. The first step is to contact the lending institution to where you send your mortgage payments (loan servicer). This may or may not be the lender who gave you the loan originally. Your loan servicer will be able to help you with the cancellation procedure and will also be able to tell you exactly how much your remaining mortgage balance is. Every loan servicing institution can have different policies regarding this procedure. Ask your servicing lender to provide in writing their specific requirements to cancel PMI insurance.
You must keep in mind that it is the servicer’s ultimate decision and that they will take many factors into consideration including the borrower’s payment history over the life of the loan before allowing you to drop this insurance. This factor alone could alter the servicer’s decision.
Although mortgage insurance may have allowed you to purchase a home, there will come a time when this added monthly expense will no longer directly benefit you. Therefore, it is in your best interest to keep the provisions surrounding it’s cancellation in mind because no one is going to cancel it for you.
You are, ultimately, your own financial advisor, and even the smallest expenses should be eliminated if at all possible. By continuing to carry insurance which is no longer required, nor needed only decreases the amount of money you have available in your pocket or your bank account.
Most lenders require a real estate appraisal by a state certified appraiser as the primary proof required to eliminate unnecessary PMI insurance.
All Area Appraisal Affiliates specialize in helping folks just like you rid themselves of unneeded and unwanted PMI insurance. We offer a free initial consultation and will help you to determine for your self at no charge or obligation if you have sufficient equity in your home to enable you to have your PMI insurance cancelled.