Orlando Mortgage Blog

Buy Now - Drop PMI Later

March 11th, 2019 12:36 PM by BILL WILBANKS

How many of you have heard "You need 20% down to buy a home"? Simply stated, that's total bull, so keep reading! Most first time buyers may see that as an insurmountable wall to attain. A $200,000 purchase would require $40,000 to be saved. While you try to do it, current rents, home prices and interest rates are going up making that 20% mark a moving target. The rationale for the 20% recommendation they tell you is to avoid mortgage insurance (PMI). What savvy buyers know is that buying with 5% down on a conventional loan even with PMI is the typical way most buyers become homeowners.  By buying now with 5% down in this example, you are able to enjoy the benefits of home ownership like appreciation of it's value to name one, with it's many advantages now even with PMI. 

Now for the good news you may not know. For loans made after July 1999, lenders are required by federal law to automatically cancel Private Mortgage Insurance (PMI) when the loan balance falls below 78 percent of your purchase price — not when you achieve 22 percent equity, which will happen much more quickly with rising property values. (Certain "higher risk" loans are excluded.) But you have the right to cancel PMI (for loans made after July 1999) once your equity reaches 20 percent of value, regardless of the original price.            

Keep track of your principal payments.  Also keep track of what other homes are selling for in your neighborhood.  If your loan is under five years old, chances are you haven't paid down much principal — it's been mostly interest.  Property values in many parts of the country have risen considerably in the last 5 to 6 years.  And that could have earned you 20 percent equity even if you hadn't paid down much principal. If you put 5% down at purchase, and if you assume an appreciation rate of only 3% along with the normal 30 year loan amortization you could expect to reach that 20% equity level after purchase in 6 years. Your rate of appreciation can be more or less of course.

When you think you've reached 20 percent equity in your home, you can begin the process of freeing yourself from PMI payments!  You will need to notify your mortgage lender that you want to cancel PMI payments and they will advise you of their specific requirements. You will certainly need to verify that you have at least 20 percent equity, that you have paid your payments on time and that values are not declining in the area. They will let you know their value determination process. Be sure to check with them before spending your time or money. 

Posted in:General
Posted by BILL WILBANKS on March 11th, 2019 12:36 PM

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