Buyers who put less than 20% down often need private-mortgage insurance – but with a 20% year-to-year uptick in home values, many owners may be able to cancel it now.
PASADENA, Calif. – Ali Elahi, one of my firm’s clients, doubled down and won big, saving $800 in monthly mortgage payments by twice lowering his mortgage rate and shedding his mortgage insurance.
Elahi paid $375,000 for his Laguna Hills condo in 2018. As rates were dropping and his equity was increasing, he was able to knock $400 off his monthly payment by refinancing in 2019. But he didn’t have quite enough equity to eliminate the mortgage insurance.
Rinse and repeat.
In June 2021, Elahi nailed it. Armed with a $440,000 property appraisal, he eliminated the $139 monthly mortgage insurance bill. And he knocked 1.25% off his interest rate, landing at 3.125%. Another $400 of overhead disappeared.
“Exhilarating,” said Elahi. “It’s a double whammy sigh of relief.”
What exactly is private mortgage insurance (PMI) and why do some borrowers have to pay it?
PMI is required for loans sold to mortgage giants Fannie Mae and Freddie Mac that do not have at least a 20% down payment or 20% equity in the case of refinance transactions. One way or the other, you must pay for a policy that protects Fannie Mae and Freddie Mac in the event you default on your home loan.
Most borrowers pay for this in a monthly premium added to your property tax and fire insurance escrow impound account. You may also pay this as a single upfront charge. Or your mortgage lender could pay – known as lender-paid premium. All that means is its baked into the rate. Never a free lunch.
Mortgage insurance is risk-based, meaning the better your middle FICO credit score, the lower the premium you pay. For example, assuming a 10% down payment on a $400,000 mortgage and a score of 740, your monthly premium would be roughly $97. For that same loan with a score of 620 (the lowest allowable for mortgage insurance), your monthly premium would be an astronomical $407.
The Homeowners Protection Act of 1998 mandates that mortgage servicers remove PMI on the date the mortgage balance is first scheduled to reach 80% of the original value.
A good payment history and no second liens are conditions for release. Or you can shed the payment with at least two years of on-time payments and 25% equity.
In this market of scorching appreciation, you have a faster path to eliminate the mortgage insurance. Either kill two birds with one stone by knocking your rate down and eliminating your PMI, or request your mortgage servicer remove the insurance premium.
Your servicer may or may not consider your request.
If the servicer entertains removing your PMI, it will likely require you to pay about $600 for an appraisal to support your assertion of 20% or more equity. If your servicer tells you to drop dead, mention you are considering going elsewhere to refinance. Your servicer does not want to lose the income from servicing your loan.
Refinancing may be the better option since mortgage rates have declined over the last several years.
Another one of my firm’s clients got lucky, but not quite lucky enough to ditch her PMI completely.
Sarah Ochwat paid $483,500 for a Laguna Niguel condo this past January, putting just 5% down. Her place has appreciated by a whopping $56,500 in eight short months. Now she has 15% equity. While that’s not enough to eliminate her PMI, she could cut her $84 premium almost in half by refinancing. She locked in a 2.75% rate the same week Freddie Mac announced its all-time lows. Her rate is better than she can get on a no-cost refinance.
“Seems frustrating, but at the same time I feel lucky,” said Ochwat. “You can’t plan any better.”
Nationally, about $1 trillion of conventional mortgages, or more than 10% of the U.S. mortgage market, is covered by PMI, according to Mike Zimmerman, senior vice president of MGIC, one of America’s largest mortgage insurance providers. The current crop of newly originated PMI business is about 85% purchase and 15% refinance.
About 13% of California mortgages purchased by Fannie Mae and Freddie Mac from January 2020 through this past June, or more than $106 billion, had mortgage insurance, according to Inside Mortgage Finance. Meanwhile, Southern California home prices increased 26% since the start of 2018, according to Attom Data Solutions.
Borrowers with a Federal Housing Administration mortgage have the same opportunity to chuck their mortgage insurance. If you have an FHA loan, eliminate the monthly premium by refinancing into a conventional mortgage.
Copyright © 2021 Pasadena Star-News