When buying a house, a 20% down payment is typically the standard. Since the risk for the lender is usually only the difference between the home value and the amount due on the loan, the 20% adds a nice cushion against the charges of foreclosure, reselling the home, and typical value variations in the event a purchaser doesn’t pay.
During the recent mortgage upturn of the mid 2000s, it became common to see lenders only asking for down payments of 10, 5, 3 or even 0 percent. How does a lender handle the additional risk of the low down payment? The answer is Private Mortgage Insurance or PMI. This supplemental policy protects the lender in the event a borrower doesn’t pay on the loan and the value of the property is lower than the balance of the loan.
Since the $40-$50 a month per $100,000 borrowed is rolled into the mortgage payment and on many occasions isn’t even tax deductible, PMI can be pricey to a borrower. As opposed to a piggyback loan where the lender absorbs all the deficits, PMI is money-making for the lender because they obtain the money, and they get the money if the borrower doesn’t pay.
How can homebuyers refrain from bearing the cost of PMI?
The Homeowners Protection Act of 1998 makes the lenders on nearly all loans to automatically cease the PMI when the principal balance of the loan equals 78 percent of the original loan amount. Acute home owners can get off the hook sooner than expected. The law guarantees that, upon request of the home owner, the PMI must be released when the principal amount equals just 80 percent.
Since it can take a significant number of years to get to the point where the principal is just 80% of the initial amount borrowed, it’s necessary to know how your Ohio home has appreciated in value. After all, any appreciation you’ve acquired over the years counts towards removing PMI. So why should you pay it after your loan balance has fallen below the 80% mark? Your neighborhood might not conform to national trends and/or your home could have acquired equity before things simmered down. So even when nationwide trends forecast falling home values, you should know most importantly that real estate is local.
A certified, Ohio licensed real estate appraiser can help homeowners figure out if their equity has reached the 20% point, as it’s a tough thing to know. It’s an appraiser’s job to keep up with the market dynamics of their area. At Appraisal Keys, Inc, we’re masters at analyzing value trends in Cleveland, Cuyahoga County, and surrounding areas, and we know when property values have risen or declined. When faced with information from an appraiser, the mortgage company will usually do away with the PMI with little effort. At that time, the homeowner can retain the savings from that point on.