Bye-Bye, Pmi - mortgage insurances - Brief Article

Kiplinger's Personal Finance Magazine, Dec, 2000 by Elizabeth Razzi, Josephine Rossi

HOME | Rising values may mean you can quit paying MORTGAGE INSURANCE.

YOU MIGHT WANT to write a little thank-you note to the folks who paid top dollar to move into your neighborhood over the past few years. Thanks to them, you may be able to scrap a mortgage insurance policy you no longer need and save a couple thousand dollars a year.

If you bought a home with less than 20% down within the past few years, the housing boom may have pushed your equity over the 20% threshold, making private mortgage insurance superfluous. A survey by HomeGain .com, a real estate Web site, shows that 95% of 61 cities surveyed had enough appreciation between 1997 and 2000 to justify dropping PMI. Improvements may bolster equity, too.

Dumping your PMI--which protects the lender from loss if a borrower with little equity quits paying the mortgage--won't be easy, but because it costs 0.5% to 1% of your loan balance each year, or $1,000 to $2,000 a year on a $200,000 mortgage, it may be worth the hassle. Nearly all lenders expect you to pay your mortgage faithfully for at least two years before you even ask to drop the insurance. And your lender will want to have its appraiser check out your home's value.

Before you shell out $250 to $300 for the appraisal, make sure the effort will be worthwhile. Look at your annual escrow-account statement to see how much you pay for PMI each month. Divide the appraisal fee by the PMI payment to see how many months it will take to recoup the appraisal cost. (If you're paying $1,000 a year, you'll recoup a $250 appraisal fee in just three months.)

You also don't want to spend money on an appraisal only to find that your equity is still shy of 20%. Take a few minutes to plug your address into a Web-based price calculator, such as at www.homegain.com, to see whether you're within shooting range. You can get a more accurate estimate by asking a real estate agent for an opinion based on sales of nearby homes similar to yours. Web sites don't take into account such factors as the number of bedrooms and bathrooms.

But one thing you don't want to do is rely on the government to get rid of your PMI. Although federal law now requires lenders to drop PMI automatically when it's no longer needed, those rules take only regularly scheduled monthly mortgage payments (not price appreciation) into account when figuring your equity. You could end up paying PMI for ten or 15 years, most of it needlessly.