Dear Ginny: We just received a letter from our mortgage company telling us that they can lower our monthly payment by $100 per month if we refinance our house. We have owned our house for five years and estimate that we have about a 20 percent equity position. After discussing this situation with the lender, I discovered that all the lender was going to do was to drop our private mortgage insurance (PMI). When I asked why the lender couldn’t just drop it without us having to refinance, the lender told me it wasn’t possible unless we refinanced. Lowering our payment by $100 per month would really help us out. Do we have any other alternatives? –Fauna & Tom L.
I continue to hear stories from homeowners who are experiencing what resembles a bait and switch from their lenders. The scenario goes something like this: “We can help you lower your monthly payments” or “You have been preapproved for lower payments on your current loan.” The homeowners then submit all the paperwork that the lender requires, only to discover that they don’t qualify for the lower rate with no points and fees. Instead, they can obtain the interest rate that they want but they will have to pay points and fees.
This is a great situation for the lender for two reasons. First, the lender makes money now because of the additional points and fees. Second, the lender will issue you a new 30-year loan and you will begin paying the loan down again from the beginning. The lender gets the largest part of the interest payments at the beginning of the loan. Quite simply, this is an excellent way for the lender to generate additional cash now while also improving future cash flow. If you keep the same loan and just eliminate your PMI, the lender makes no additional money. This may be part of the reason the lender was pressuring you to refinance.
There are several ways that you can remove the PMI from your property. To understand how this works, it’s important to understand exactly what PMI is. According to the Federal Reserve: “PMI is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80 percent of their new home’s value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI.”
The Homeowner’s Protection Act of 1999 (HPA) outlines several different avenues for eliminating your PMI payment. The most common way that owners eliminate their PMI payment occurs when they either pay down their existing mortgage so that they have a 20 percent equity position, or when the loan amount is 80 percent of the property’s current value. From your letter, you may already qualify.
HPA guidelines say that you are eligible to eliminate PMI when you pay down your mortgage “to the point that it equals 80 percent of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less.” The lender will require proof that you do not have any secondary financing (e.g., a home equity loan) on the property. To qualify, you cannot have been 30 days late on your payments during the last year or 60 days late within the last two years.
Under HPA, lenders are required to automatically cancel your PMI once your mortgage is 78 percent of the value of your original loan. If your loan is not a conforming loan, the number where automatic termination kicks in is 77 percent. Again, you must be current on your existing loan. To see when you will reach that number, here are two separate calculators from two different sites: Federal Reserve and PrivateMI.
In the past, a number of my clients were able to have their PMI removed by working with an appraiser and/or from a comparable market analysis (CMA) that I prepared for them. Appraisals can be expensive ($500 or more), but if you are already paying $100 per month in PMI it would probably be worth it to explore this avenue. Alternatively, contact the agent who sold you the house and ask her to do an updated CMA on the property.
Ask her to do a price-per-square-foot analysis and to provide pictures of comparable sales if possible. The more detail you have for the lender, the easier it will be to persuade them.
Furthermore, Zillow, Trulia and HomeGain are among the online sites that offer comparable sales information. Check these resources to see if they support your case. If they do, then use them. If not, ignore them.
Good luck getting rid of your PMI. If you don’t qualify right now, continue to track your property value as well as how much you have paid down on your loan. The sooner you can get rid of the PMI, the more money you can save.