Is home’s original value based on appraisal?

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Dear Dr. Don,
I’m trying to figure out my home’s original value. I can’t find the specific text from the Homeowners Protection Act of 1998 (HOPA). But as far as the original value, is that the purchase price or appraisal value at the time of purchase?

In our case, the purchase price was $187,000 and the house appraised at $200,000. The loan balance is currently $159,900. According to the mortgage lender, we are at 85.4 percent loan-to-value ratio, which is based on the $187,000. But I hope that we should be using the $200,000 value, which would put us just below 80 percent loan to value. Any guidance?
— Scott Scoping

Dear Scott,
I don’t hear from many readers wanting to try to slog through an actual legislative act!

Let’s start out in your case by using the FTC’s Consumer Alert “Cancellation of Private Mortgage Insurance: Federal Law May Save You Hundreds of Dollars Each Year,” with an excerpt below:

For home mortgages signed on or after July 29, 1999, your PMI must — with certain exceptions — be terminated automatically when you reach 22 percent equity in your home based on the original property value, if your mortgage payments are current. Your PMI also can be canceled, when you request — with certain exceptions — when you reach 20 percent equity in your home based on the original property value, if your mortgage payments are current.

The key is that PMI, or private mortgage insurance, cancellation under the act is based on the original property value. It’s normal and customary for lenders to use the lower of the purchase price or the appraised value in determining the loan-to-value when you purchase a new home. That standard is also established in the act.

The Federal Reserve publication “Homeowners Protection Act” provides the information on loan-to-value. It’s the lender that’s requiring PMI, so it isn’t going to use that earlier appraisal in determining when it’s time to cancel the PMI policy.

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