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Ask Dr. Don
By
Don
Taylor,
Ph.D.,
CFA
•
Bankrate.com |
Canceling PMI
Dear Dr. Don,
We have a first mortgage and a second
mortgage with a different lender, which is almost approximately
100 percent of our equity. I know to get rid of PMI on the first
mortgage, our equity must be valued at 20 percent to 22 percent.
My question is, assuming we are at or reach 20 percent to 22 percent
equity before the home equity loan is paid off, can we get rid of
PMI on the first mortgage? Or is that affected by the home equity
loan with the second lender?
Kim Cancel
Dear Kim,
The first mortgage lender doesn't worry about the second mortgage
lender's security interest in your home. It's the loan-to-value
(LTV) of the first mortgage loan that's important.
The Homeowners Protection Act of 1998 took effect
at the end of July in 1999. It stipulates that private mortgage
insurance has to be canceled when the loan balance falls to 78 percent
of the home's initial purchase price for mortgages closed on or
after July 29, 1999. Borrowers can request cancellation of the PMI
policy when the loan balance reaches 80 percent of the purchase
price.
What the act doesn't provide for is how lenders have
to treat the increase in equity resulting from price appreciation.
Most lenders will consider price appreciation in the decision to
cancel PMI, but may require the homeowner to pay for an appraisal
to justify the cancellation.
Refinancing is also an option when lenders balk at canceling the
policy based on your home's appreciated value. Refinancing was an
easier decision in a declining rate environment and can be problematic
as interest rates move higher. Additional principal payments to
bring down the loan balance can conceivably make more sense than
paying closing costs on a new loan at a higher rate.
Another provision of the act is that your mortgage
lender has to contact you annually about how to cancel the PMI,
and provide an address and telephone number for the company that
services your mortgage. Check out the Bankrate article, written
when the law took effect, which is a good primer on the Homeowners
Protection Act.
-- Posted: May 27, 2004
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