You need to purchase private mortgage insurance or PMI if you put down less than 20 percent on your mortgage. It gives your financial institution an opportunity to recover some of its losses in case you face difficulty at the time of repayment. However, it’s not economical and therefore homeowners tend to stay away from it.
During the boom years, majority of homebuyers were not that bothered about the private mortgage insurance because they were of the view that they can drop it in a matter of two to three years with jump in the value of their house.
The guidelines for private mortgage insurance allow you to request that it be cancelled once the balance of your mortgage equals 80 percent of your house value, and the way values of house were increasing at that time, it wasn’t taking very long.
But this is not the case anymore especially with house values being plummeted, lots of homeowners are left with no option than to pay for private mortgage insurance for an extended period. In case if you only put 10 percent down and your house value has dipped by one-third, you are going to take plenty of time in reaching the 80 percent mark.
However, just because the value of your house has decreased, it doesn’t mean you can’t get rid of PMI in a short time frame. According to experts, you’re entitled to have private mortgage insurance cancelled in a automatic manner once the balance of your mortgage dips to 78 percent of the original house value – the buying price.
You are going to get this irrespective of how much your house have dipped in terms of value, or how far underwater you are with regard to mortgage. Plenty of homeowners are not aware of this, because there main focus is on achieving an 80 percent loan-to-value ratio.
Point to be noted here is that you can’t hasten this routine along by making huge mortgage payments. Fact of the matter is that you don’t qualify for automatic private mortgage insurance cancellation until the mortgage balance date reaches the figure of 78 percent, taking into consideration your amortization schedule.
That’s not a good scenario for homeowners because they might be able to save huge amount of money if they could get rid of three or four years of insurance payments with a one lump sum payment toward their mortgage balance. This also means that you can’t increase your payments in order to qualify for a HARP underwater refinance.
By Robert Charlson