Homeowners May Save on Lender Insurance

Homeowners in Los Angeles and Orange counties--where housing prices soared 20% to 30% last year--may be able to save some money each month by checking into the status of their private mortgage insurance. This is insurance that most lenders require borrowers to purchase--as part of their escrow package--when they are putting down less than 20% of the purchase price of the house. That way, if the borrower defaults on the loan, the private mortgage insurance firm has to reimburse the lender for at least some of its losses.

In most cases, PMI is included in your impound account with your regular loan amount, taxes and insurance, and prorated monthly; i.e. you pay it without realizing it’s in there.

However, borrowers may not be required to keep paying PMI once their equity in the house reaches a certain point (or they have held the mortgage for a long enough period of time). And with home values appreciating as they have been in Southern California, many homeowners quickly reach the point where they would no longer be required to carry PMI.

“Say, you could buy a house for $100,000--that’s a joke these days--and you could only put down $10,000. That’s a 90% loan. And the lenders feel that there is a greater likelihood of people walking away when they have less than 20% down,� said Mike Delamater of Fred Sands/Santa Monica. “They feel it’s a riskier loan. But then what happens is the people who get the loan forget they have a PMI and it runs forever. They don’t remember to contact their lender about it. It can add up to a lot of money, especially if you’re talking about a 30-year mortgage.�

“It’s a good thing for people to be aware of because it can be costly to them,� Delamater added. “If they borrowed $90,000, the PMI would be about 1% up front, so that’s $900 there you’ll never get back. But, then you’re charged .25% a year, and that’s $225 you could save by having it removed. That doesn’t sound like much, but if you’re paying it needlessly for 10 years, it is. And at least on the Westside, $90,000 is nothing. People are financing $300,000 on a house.�

(If you bought your home before 1984 and have PMI, the cost to you will be less per month than for someone who bought a house after 1984-1986, when the PMI rates increased significantly, according to Pete Mills, senior research analyst with the California Assn. of Realtors.)

Most Lenders Want Proof

Homeowners should check their original loan documents or their settlement statement from the escrow company at the time of the home purchase to see if they have PMI. Or it might also be listed on your monthly mortgage statement.

If you have one, you usually can’t get it removed by a simple phone call. Most lenders typically want some proof that your house has appreciated to an 80-20 loan-to-value ratio. Some have stricter rules about PMI than others.

To remove the PMI, one lender might require only a letter from a local realtor stating the current value of your house. Another, however, might require a full evaluation by an appraiser approved by the lending institution.

A full home appraisal costs an average of $200 to $275.

Some lenders will insist on keeping the PMI for the duration of the loan and, unfortunately, that’s your tough luck. Eliminating the PMI is strictly up to the lender. There is no state law requiring cancellation of PMIs under any particular conditions.

“When property appreciates the way it does here, most people could show a substantial increase in value of their property,� Delamater explained. “In some areas homes appreciated 50% last year. In some cases they’ve been increasing 10% a month in value.�

After determining that you have PMI, the first thing you should do is contact your lender and find out what the requirements are for removing it--if that company is still holding your mortgage.

If it isn’t, ask the name of the company that bought your mortgage and check its requirements for PMI. If, by chance, the Federal National Mortgage Assn.--better known as Fannie Mae--has purchased your loan, you’re in luck because you can get the PMI removed two different ways.

Fannie Mae Purchases

And Fannie Mae, a congressionally-chartered, publicly-owned Washington agency, buys a lot of mortgages, 900,000 a year. It is the largest investor in American home mortgages in the country.

If you call your lender to check whether Fannie Mae has purchased your mortgage, the lender is required by contractual arrangement with Fannie Mae to inform you by phone if that’s the case.

If your mortgage is owned by Fannie Mae, you can get your PMI premiums canceled if the balance of your mortgage has been paid down to 80% of the original loan amount. Fannie Mae requires lenders--the agency contracts with your original lender to keep managing the loan even though Fannie Mae owns it--to allow you to do that. But the agency does not keep a record of how many homeowners take advantage of that regulation.

When you are paid down to 80% of your loan, “the lender may automatically remove the PMI without notifying Fannie Mae,� a spokeswoman for the agency said.

In fact, two years ago, Fannie Mae changed its regulations and decided to insist that lenders remove the PMI if the borrower can prove that the equity in his home is at least 20% of the home’s current value.

“If the homeowner feels his home has an 80-20 value of appreciation, he needs to get a full appraisal by a certified appraiser and send that on a universal appraisal form to the lender with a letter stating he wants the PMI removed,� said the Fannie Mae spokeswoman. “Then the lender must remove it if Fannie Mae owns the loan.�

In the case of the Federal Home Loan Mortgage Corp. (Freddie Mac), an agency that functions much like Fannie Mae but is privately owned, the rules are much stricter.

If your mortgage has been purchased by Freddie Mac, it will not permit lenders to remove the PMI unless the mortgage is at least seven years old.

Freddie Mac maintains that policy, an agency spokesman said, because two-thirds of the claims paid by mortgage insurers when homeowners default are made within the first five to seven years of the mortgage.

To date, Freddie Mac has staunchly refused to recognize the appreciated value of a home as a reason for removing PMI. But there are signs things may be changing.

Just this week, a Freddie Mac spokeswoman said that there are major changes in the works that will affect PMI, but was not able to say just when those liberalizations will be announced.

Under consideration, according to real estate insiders, is a proposal to recognize increases in home equity through home improvements or a good payment history. The agency also is said to be considering a policy similar to that of Fannie Mae--recognizing some form of appreciation of property value based on current real estate market prices.

Stay tuned.