Happy Homeowners in Kirkland Fight Mortgage Insurance Premium

It Took 12 Months but Homeowners Finally Happy To Save $2652 Per Year

In early 2009, when absolutely no one was purchasing homes, my clients, the Parkers, did.  Their lease was up on the home they had been renting and unable to lease the same home again and find another home that would take their 4 large dogs, they started thinking it was time to own again. They currently owned a home in Florida that was purchased using Bryan’s VA privileges. With VA loans homeowners don’t have to pay mortgage insurance so it was an adjustment to start thinking that they would have to pay an extra $200-250/month for something that would never really benefit from. Because VA can only be used on one home at a time and they couldn’t sell their Florida home just then, they could not use their VA privileges for this purchase.  

Purchasing private mortgage insurance is unavoidable for some homeowners, but you shouldn’t pay MI premiums any longer than required by your lender.

Mortgage insurance protects a lender in case homeowners default on their mortgage. Unless you make a 20% downpayment on a house, you’ll most likely be required to purchase MI. MI premiums on a median priced home in the U.S. in 2010 can run between $95 and $170 per month, according to the Mortgage Insurance Companies of America.

Sensing that many sellers were scared wittless and left uncertain by what was going on in the economy and lack of sales in the real estate market, they thought they might be  well poised to make a seller a lower offer. Bryan and Simadid, it was accpeted, and they ended up purchasing a small home with a one acre, fully fenced yard in Juanita using Conventional financing  and putting 10% down. The home was a stellar value and purchased for $360k, about $40k below market value.

However, the appraisal came in for exactly contract value. It didn’t reflect the almost $40k more that the home was actually worth.  Presumably nervous by the blacklisting of appraisers by banks at the time and presumably having found a newly conservative attitude towards appraising, our appraiser simply gave us the amount that would get us our loan. Nevermind the 2 nearly identical homes on the same street that had sold for $40k more just 3 months earlier. My hope was that if we could establish the home as having 20% or more in value right off the bat, the buyers, also having put 10% down, could avoid mortage insurance altogether on this. And if not initially (due to lender requirements) then it could be canceled shortly after closing.  Alas, the appraiser could not be budged and  it was what it was.      

Still unnerved by having to figuratively throw out $221 of their money out the window every month, the Parkers did something that was absolutely key to their success in eliminating their MI - they remembered they had it. Rather than passively making their payments on autopilot every month, the Parkers read their statements and saw the MI charged. Also realizing that this economy was still shaky and that there was the potential for home values to decline even more, they became determined to cancel the MI while they still had value.    

MI might be unavoidable, but it isn’t eternal. Knowing exactly when you’re entitled to cancel coverage can save you a bundle. If you own a median priced home, you’ll pocket between anywhere from $800 to $1,600 for each year’s worth of premiums you can avoid. That extra cash can be used to pay down your principal instead.

When MI is cancelled automatically

Though often begrudged, MI plays an important role. Many aspiring homeowners, especially first-time buyers, simply can’t afford to put down 20% on a house. Without the safeguard offered by MI, lenders would be reluctant to extend mortgages to low-equity purchasers.

For many borrowers, the coverage is short-lived. The Mortgage Insurance Companies of America, the industry trade group, estimates that 90% of homeowners are done paying PMI premiums, which are tax-deductible,  for some within five years. However in an unstable market, that could be up to 10 years.

If you purchased a house since 1999 and are still paying MI, you probably fall under the Homeowners Protection Act (HPA) of 1998. Your lender is required to automatically cancel your MI once you’ve paid down your mortgage to a 78% (0.78) loan-to-value ratio, or LTV. Put another way, once you have 22% equity built up. Many lenders will treat pre-HPA loans in a similar fashion. Call to your lender confirm.

To calculate your LTV, divide the outstanding loan amount by the original price of your home. If you have a $190,000 mortgage on a house you purchased for $200,000, the LTV is 95%. You’d need to get the mortgage balance down to $156,000–78% of the original value–to qualify for automatic cancellation of PMI.

When you need to request cancellation

You don’t necessarily have to wait for automatic cancellation. When you beleive your LTV hits 80% and you can prove it, you can petition your lender to end its MI requirement. Your lender isn’t obligated to grant your request, but you’ll bolster your case if you have a good payment history.

You can start by calling your lender, not the MI provider. You’ll probably need to make a formal request in writing  and pay out of pocket for an appraisal. The average cost of an appraisal is $400, according to a 2009 Bankrate.com. Your lender will usually select the appraiser.

Although an appraisal is conducted primarily for the benefit of the lender to confirm that your property hasn’t declined from its original value, a high appraisal can work to your advantage. As your property value increases, whether due to a general uptick in real estate prices or specific home improvements, your LTV decreases.

A few months after their purchase the Parkers called their lender to request a cancellation of their MI. They were told they needed to hold the mortgage for 1 year before they were eligable for review. Ugh. And unfair, right?

Nevertheless the Parkers waited 12 months so they could be “reviewed” and considered as candidates for their MI to be dropped. Luckily, in their neighborhood, home values stayed pretty steady and they even had 2 more nearby  homes sell for $40k more than theirs.  They called the lender and were told that the new policy was 18 months out for consideration of a review. That’s when they…. Got Jesse!   Only kidding. They didn’t go on theevening  news but they did get a real estate attorney to review their loan paperwork and draft a letter to the bank for $250. Meanwhile they were told by another bank employee that the policy was now 2 years out!

Shortly after sending the demand letter from the bank, the Parkers were notified in writing that their lender would consider them for a MI cancellation IF they were willing to pay for the $450 appraisal themselves and wait out the 90 day review period. The Parkers gladly paid for the appraisal.

This time the bank ordered appraisal came in at exactly what they bought it for and they were declined. They would continue to pay MI. Surprised (and yet not surprised) they wanted to contest. The bank said it would be another 6 months before they could contest. This time they waited 6 months, contacted the bank, and asked how to proceed.  Again they would need to order an appraisal – ordered by the lender – and hesitantly, they did.

What would happen if it didn’t come back with 80% LTV? They would certainly be out $900 in udeless appraisals. However, it was worth it to take the gamble one more time because they had seen the data and the stats showed their home value to be solid. This wasn’t an emotional plea but one based on facts. If this didn’t go through, they agreed to wait it out a few years an try again then the economy bounced back.

The second appraisal ended up coming back with a value that would put the Parkers at a 77% LTV. So close!! Yes no cigar. You need to be at at least 78% to qualify and more likely at %80+. 

But are the Parkers the kind of people to give up? No way! They continuously called and provided sold comparable info and evidence of their good payment history to the bank. When they wouldn’t get some where with one representative, they would go up the chain. Or call back the next day. Another harsh letter from their attorney might have helped their cause, too.

Then in May, the Parkers received notice that their lender was aleviating them from the burden of MI. And as of June 2011, they would no longer be required to make MI payments! They were finally MI FREE!

They estimate it cost them about $500 in attorneys fees and about $900 in appraisal fees plus about 60 hours worth of time but they feel that it’s worth it. Especially ongoing. Sima Parker told me, “At some point you think “You made a wise investment in the beginning and you shouldn’t have had to pay MI all along” but the bigger picture is that we wanted to be homeowners and live like we do in the area we do now. So sometimes in order to live your life the way you want, you have to play along with the banks to get the loan.”   

A way around PMI premiums

In search of a PMI loophole? Far and few between these days are piggyback loans, also known as 80/10 or 80/15 loans. Basically, the home lender finances 80% and immediately gives you a second loan for 10% to 15%. You put down 5% to 10%. MI is generally not required. This alternative has traditionally been available for homebuyers with minimal capital but excellent credit. In tight lending environments, however, this arrangement is harder to come by. And even when piggyback loans are available, the extra interest you usually pay on the second mortgage may actually cost more than PMI premiums. Do the math.

Another option would be the Fannie Mae sponsored Homepath Loan. These loans offer competetive rates, no appraisal fees, and no MI. However, they are only available on Fannie Mae foreclosed homes.

Also, if you have VA eligibility, you may want to look into that. VA loans offer no downpayment, are more  laxed on credit requirements, and charge no MI.

-Jennifer Nilssen, TEC Real Estate

Jennifer Nilssen is Realtor living and practicing in Kirkland, WA. If you have a question or comment about this blog post, please feel free to contact Jennifer at jen@tecrealestate.com or visit www.livekirklandwa.com for more resources.