Today, Dr. Don helps a condo owner who wants to be free of primary mortgage insurance payments, and discusses the practice of escrowing property taxes and homeowner's insurance premiums.

Getting rid of PMI

Dear Dr. Don,
I paid $110,000 for my condo in 1998 with a 5 percent down payment. My monthly mortgage payment is $841, of which $42 is the PMI premium. The current loan balance is about $104,000. I called my mortgage company and was told the PMI will stay on until 2010. A condo sold three weeks ago for $138,000 and one sold in December for $128,000. Both units are exactly like mine, except the $138,000 unit has air conditioning and the other had upgrades of new kitchen cabinets, and both have extra skylights. Trying to determine if my condo had reached 20 percent equity, I used your calculation of 80 percent divided by my loan balance of $104,000. I come up with $131,250, which is about where I estimate the condo would be appraised. What do you suggest? Should I spend the money to get an appraisal to get rid of the PMI now or should I just wait? Thanks for any suggestions.
Condo Cindy

Dear Cindy,
The lender wants you to pay PMI for another 10 years? Ouch. That's the problem with the new law. It requires lenders to cancel PMI when the owner's equity exceeds twenty-two percent, but the law doesn't consider how equity increases when the home's value increases. It's like you're frozen in time. Without any early principal payments, your loan balance in 2010 will be about $88,000, which is 80 percent of your $110,000 purchase price.

Except for FHA loans, you have the right to ask your lender to drop PMI charges when your loan balance reaches 80 percent of the purchase price. The lender is required to cancel PMI coverage when the loan balance drops to 78 percent, but only on mortgages made after July 29, 1999 -- the effective date of the new law.

Lenders don't have to accept an appraisal as justification for canceling the PMI policy. That leaves a lot of homeowners frustrated. Some lenders are willing to work with the homeowner, but your lender doesn't seem too anxious to help you out on this point.

Refinancing is an option because your new mortgage will be based on a new appraisal, but paying closing costs to cancel the PMI payment will reduce or eliminate your cost savings. And refinancing will subject you to today's higher interest rates. Check out this site's feature, "Steps to cancel PMI" to review approaches to canceling your PMI policy without refinancing your home. Also take a look at PMI Rescue, a Web site devoted to helping homeowners cancel their PMI policies.

With a willing lender, your estimate of the condo's loan-to-value puts it right on the edge of eligibility to drop the PMI policy. Unfortunately, you don't have a willing lender. I think you'd have a much stronger case next year, after another year's appreciation and loan payments. Meanwhile, write your lender and ask them to provide, in writing, the minimum amount the property will have to be valued at to qualify to have the PMI dropped.

PITI

Dear Dr. Don,
Is it better to pay property taxes separately, or to have them included with the mortgage payment?
Piti Pat

Dear Pat,
Lenders like to escrow your property taxes and homeowners insurance premiums because it reduces the risk that these go unpaid, leaving the lender vulnerable to loss from tax liens or property damage. Mortgage loans that have these escrow payments have principal, interest, tax and insurance components, or PITI. The smaller the down payment, the more likely it is that your taxes and insurance will be paid through an escrow account.

Homeowners have mixed feelings about escrow accounts. They help in budgeting, forcing the homeowner to contribute to the payments in monthly installments, but they tie up his money over the course of a year when it could have been invested elsewhere.

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-- Posted: July 19, 2000