A 20% down payment is typically the standard when purchasing a home. Since the liability for the lender is generally only the difference
between the home value and the amount remaining on the loan, the 20% supplies a nice buffer against the costs of foreclosure, selling the home
again, and typical value variations in the event a purchaser defaults.
The market was working with down payments dropping to 10, 5 and even 0 percent during the mortgage boom of the last decade. How does a
lender handle the added risk of the low down payment? The solution is Private Mortgage Insurance or PMI. PMI covers the lender in case a
borrower doesn't pay on the loan and the market price of the home is lower than what the borrower still owes on the loan.
PMI can be expensive to a borrower on the grounds that the $40-$50 a month per $100,000 borrowed is bundled into the mortgage payment and
on many occasions isn't even tax deductible. It's lucrative for the lender because they collect the money, and they get paid if the borrower
is unable to pay, in contrast to a piggyback loan where the lender takes in all the damages.
With the passage of The Homeowners Protection Act of 1998, lenders are forced to automatically stop the PMI when the principal balance of the
loan reaches 78 percent of the beginning loan amount on nearly all loans. The law designates that, at the request of the home owner, the PMI must
be dropped when the principal amount reaches only 80 percent. So, wise home owners can get off the hook a little early.
It can take many years to arrive at the point where the principal is just 80% of the initial loan amount, so it's essential to know how your
Arizona or California home has increased in value. After all, any appreciation you've obtained over time counts towards removing PMI. So why pay
it after the balance of your loan has fallen below the 80% threshold? Even when nationwide trends signify declining home values, realize that real
estate is local. Your neighborhood may not be reflecting the national trends and/or your home may have acquired equity before things simmered down.
The difficult thing for almost all homeowners to determine is
whether their home equity has exceeded the 20% point. An
accredited, Arizona or California licensed real estate appraiser
can surely help. It's an appraiser's job to know the market
dynamics of their area. At Priority Appraisal, we know when
property values have risen or declined. We're experts at
recognizing value trends in Phoenix and Sacramento metropolitan areas. Faced with
figures from an appraiser, the mortgage company will usually remove the PMI with little trouble. At which time, the home owner can retain the savings
from that point on.
Click here if you are paying for Private Mortgage Insurance (PMI) and you would like to remove it?