Appreciation: Fast Relief for PMI Sufferers

Dear Readers,
Yes, I’m providing another déjà vu experience for you this month. Here’s an updated article that originally appeared a few years ago—I think it bears repeating for the sake of anyone who is needlessly paying private mortgage insurance…

Dear Pat,
When we bought our house three years ago, we only had 5% for the down payment, so an extra charge of $111 was added to our monthly payments for “private mortgage insurance.” The lender said that once we had 20% equity in the house, we would no longer be required to make the additional payment. Fine, but who determines when that happens? Will the bank tell us?
---Losing patience

Dear Losing,

Don’t hold your breath waiting for the bank to call. Lenders feel no obligation to remove the private mortgage insurance until you’ve made enough payments to reduce the debt-to-purchase price to 78%, which would take over ten years with a 30-year, 7% loan! Faster relief is available, but you must act yourself to make it happen.

First, a simple primer on private mortgage insurance (PMI): a conventional loan down payment of less than 20% automatically requires the borrower to pay some percentage of the loan monthly as mortgage insurance, to protect the lender against default. This can range from .84% for a 5% down payment to .32% with 19% down. Typically, a borrower with 10% down would have to pay about $130 for PMI on a $200,000 loan.

Now, the good news: given the fast-rising property values in our area, you could easily have the required margin of equity within 2 or 3 years, even if you put only 5% down. Call a Realtor for a market opinion of your home (a service which is nearly always provided as a courtesy). If it appears that your home has increased in value sufficiently, then call your bank and ask about their requirements for removal of the PMI. Most lenders require an appraisal, at your expense (about $300), completed by someone on their approved appraiser list. That’s your only cost, and you’ll make it up within 3 months of PMI-less payments!

A caution: banks require that the loan be “seasoned” for at least one year (some as long as three years) before PMI can be removed. Check with your lender. Bigger caution: if you’ve been late on payments, you may not be able to get your PMI removed at all.

First, do your best to stop water intrusion from outside: install good gutters and downspouts with adequate extenders, landscape to promote drainage away from the house, and if necessary, drain tile the basement. Next, make sure you're not adding moisture (from plants, humidifier, long showers, etc.) to be trapped inside due to inadequate ventilation.