With a decent credit rating, a buyer can secure a loan for a house. Why So Easy?  Because these transactions are secured by a very valuable asset: The Home Itself.    If the buyer/borrower defaults on the loan, the risk for the lender is often only the difference between the value of the home and the amount outstanding on the loan, less the amount it costs them to foreclose and resell the property.

For this reason, lenders are very hesitant of lending more than a certain percentage of a homes value. Traditionally, this has been 80 percent. The cushion this provides the lender helps ensure that their losses from loan defaults are kept to a minimum.

In recent years, however, it has become increasingly more common to see home buyers using down payments of 10%, 5% or even 0%.  Loaning this much presents the lenders with a lot more risk. To offset this risk, these transactions often require Private Mortgage Insurance or PMI. This supplemental policy protects the lender in case the borrower defaults on the loan, and the value of the house is lower than the loan balance.

PMI has been a large money-maker for the mortgage lenders. The amount of the insurance often $200-$300 per month for a $300,000 house is commonly rolled into   the mortgage payment. Over time, this additional fee is often overlooked. Some Homeowners continue to pay the PMI even after their loan balance has dropped below the original 80 percent threshold.  Until recently lenders were under no obligation to tell home owners when they had reached a point where the PMI can be dropped. That all changed in 1999, when the Homeowners Protection Act took effect.  This law now obligates lenders to terminate the PMI when the principal balance of the loan reaches 78 percent of the original loan amount. This occurs naturally, of course, as the borrower pays down the principal on the loan. But on a typical 30-year loan, it can take ten or more years to reach that point naturally by just making the payments.  Smart homeowners can get off the hook earlier! The law stipulates that, upon request of the home owner, the PMI must be dropped when the principal amount reaches only 80 percent!

There's another way that your Equity can get down to the 80/20 percent ratio:     Here in California we've seen unprecedented and significant gains in the value of Real Estate over the past 10 years.  Even those living in areas with modest gains may find that the value of their property has quickly grown to the point where the amount of principal they owe on their loan is less than 80 percent of the homes value. Again, in these cases, the lenders are under no legal obligation to remove the PMI. Nor are they set up to monitor the homes market appreciation.  This is where a Certified, Licensed Real Estate Appraiser Can Help!  It's our job to know the market dynamics in this area.  We know when and how much property values have risen. We can run comparable sales 1st - to make sure it will be advantageous for you to order an appraisal.           The savings from dropping the PMI will easily pay for the appraisal, and then You can enjoy the savings from that point on!

For more information on PMI and the Homeowners Protection Act, try one of these links:

Cancellation of Private Mortgage Insurance: Federal Law May Save You Hundreds of Dollars Each Year

Private Mortgage Insurance (PMI): Law Requires Lenders to Cancel PMI