Ask Dr. Don
By Don Taylor, Ph.D., CFA • Bankrate.com
Today, Dr. Don explains how to
determine if you can drop PMI, and discusses the dissolution of
assets in a divorce.
Canceling PMI
Dear Dr. Don,
When we bought our house seven months ago, we didn't have
20 percent to put down, so we have been paying PMI. Since then,
the house has been appraised at a higher rate, so the mortgage company
is willing to drop our PMI, but at a higher interest rate. Is this
legal?
David Dropit
Dear David,
I've made a deal with my editor: I don't purport to be
an attorney, and he lets me keep writing this column.
The new legislation requires PMI cancellation
after a home achieves a loan-to-value ratio of about 80 percent.
Unfortunately, the law looks to the declining loan balance as it
relates to the initial loan-to-value and not at the home's appreciation.
Your lender is saying that to drop PMI you need
a new loan based on a new appraisal. That's not true. What has to
happen is the lender has to accept your home's newly appraised value
in determining whether the loan-to-value is 80 percent or less.
There's not much incentive for the lender to accept the new appraisal.
Take a look at PMI
RESCUE. The organization is an alliance of state-certified residential
and commercial real estate appraisers. Their Web site discusses
approaches in negotiating with your lender to cancel PMI based on
your home's appreciation. I haven't reviewed the guide that the
group sells on the site, so don't take this as a recommendation
to purchase it. Look at the site to help you define the issues facing
you in getting your lender to drop the PMI policy without getting
a new loan.
Refinancing after a divorce
Dear Dr. Don,
My husband and I are divorcing after 19 years of marriage.
We have agreed to a dissolution of assets. I will get the house
and in turn I give up my interest in his 401(k) plan. I will be
responsible for the mortgage and the home equity loan payments.
The mortgage is at 6.5 percent with nine years remaining on a 15-year
loan. The balance is $33,000. I think the equity loan is at 11 percent
for 10 years with a $30,000 balance. Should I refinance or leave
the loans in place? What are the disadvantages vs. the advantages?
Phoebe Phoenix
Dear Phoebe,
Your ability to qualify for credit will be a major determinant
in this decision. If you can't get a mortgage, then there's no decision
to be made. If you can get a mortgage and the rate is higher than
the estimated blended interest rate of about 8.65 percent, then
stick with what you've got. The national average for a 15-year fixed
rate mortgage is 7.63 percent and 8.03 percent for a 30-year fixed
rate mortgage. I'm assuming you have enough equity in the home to
roll these two loans into one mortgage, otherwise you might want
to reconsider door No. 2 -- the 401(k) plan. Extending the
term, whether it's to 15 or 30 years, will reduce the monthly expense
but you'll be paying more in interest by extending. Make sure there's
no prepayment penalties on the home equity loan before committing
to pay off that loan.
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-- Posted: March 22, 2000
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