PRIVATE MORTGAGE INSURANCE (PMI) DEFINED
more than a certain percentage of a property's fair market value, usually
80% to 100%, significantly increases the risk associated with a loan. To
guarantee a financial institution against loss, or to mitigate against their
increased risk, private mortgage insurance (PMI) is generally required when
"high" loan-to-value ratios are identified. If a default occurs, and the
house value is lower than the loan balance, the financial institution is
compensated for their loss.
Mortgage insurance has, however, become a windfall for the mortgage lenders. Insurance premiums, often $ 40 to $ 50 per month for a $100,000 house, are combined with mortgage payments and notice is not given to a homeowners when their loan balance drops below the original 80% threshold. Thousands of dollars are thus spent to pay for insurance that is no longer required.
Appraisers can assist homeowners by identifying, via the completion of an appraisal report, when a property has passed beyond the threshold required to allow for the removal of the PMI payments.
NATIONAL ASSOCIATON OF REALTORS (NAR) PRESS RELEASE
NAR: Pro-Consumer PMI Legislation Would Eliminate Unnecessary Housing Costs
WASHINGTON, Feb. 25 /PRNewswire/ -- Federal legislation requiring cancellation of private mortgage insurance (PMI) would protect home owners nationwide from paying millions of dollars in unnecessary housing costs that provide them no benefit, according to a representative for the National Association of Realtors. NAR President-elect Layne Morrill discussed PMI legislation, The Home Owners Protection Act of 1997 (S.318) during testimony today before the U.S. Senate Committee on Banking, Housing and Urban Affairs. The bill, introduced by Senate Banking Committee Chairman Alfonse D'Amato, R-N.Y., would require lenders to notify consumers of their right to request cancellation of PMI once the home owner has accumulated equity totaling at least 20 percent of the original purchase price of the home.
"Millions of consumers nationwide are paying for private mortgage insurance they don't need. These bills would help stop this unnecessary drain on home owners' pocketbooks," Morrill said. Generally, lenders require home buyers to purchase PMI to obtain conventional home loans covering more than 80 percent of the purchase price. In most cases, a portion of the PMI is paid upfront at closing, and the remainder is amortized and included in the monthly mortgage payments. The rationale behind the requirement is that a home owner with a relatively small amount of equity -- less than 20 percent -- is more prone to loan default and ultimately home foreclosure than home owners with more than 20 percent of the purchase price invested in their homes. As a result, the buyer making a lower down payment represents a greater risk to the lender, thus necessitating a requirement for mortgage insurance. NAR understands the need for lender protection in cases involving low downpayments, Morrill noted. However, the association is concerned with the difficulty consumers face when trying to have this insurance eliminated once they have "paid down" their mortgages to a point that provides them with at least 20 percent equity in their homes, he explained. "Private mortgage insurance clearly serves a useful role, because it protects lenders against loan defaults and helps to make mortgage financing more accessible to home buyers with smaller down payments. However, home owners deserve the right to cancel their private mortgage mortgage insurance when it is no longer needed. In many cases, home owners who try to do this wind up in a tangle of delays and confusion," he said. More than half of all home buyers who make down payments of less than 20 percent carry private mortgage insurance, while the remainder of the market is served by government housing finance programs. Although monthly PMI costs depend on the downpayment amount and the amount of PMI paid at closing, costs generally range between $35 and $100 a month. Currently, home owners seeking to cancel PMI generally must obtain a home appraisal proving to the lender that they have at minimum of 20 percent equity in their home, based on the appraised value. Morrill pointed out that this situation often causes frustration for the home owner, due to the lender's refusal to accept the appraisal. The legislation's requirement that the PMI removal be based on purchase price, rather than appraised value, would eliminate this obstacle, he noted. Although the legislation currently does not require the identity of the private mortgage insurer to be disclosed to the consumers, Morrill said this information should be made available when the transaction is closed. "Despite the fact that the mortgage insurer's client is the lender, the home buyer is the party paying the mortgage insurance premium," he said. "This single bit of information is critical in resolving negotiations with a mortgage lender." Morrill pointed out that offering PMI cancellation would enhance customer relations between lenders and home owners. "Mortgage lenders could take a giant step forward in shoring up their relationships with home buyers ... Whether unintentional or not, lenders who retain unnecessary mortgage insurance premiums are doing the mortgage finance industry a disservice in the long run," he said. "Home buyers and home owners have plenty of legitimate expenses without being saddled with costs that give them no benefit." The National Association of Realtors, "The Voice for Real Estate," is the nation's largest professional association, representing nearly 730,000 members involved in all aspects of the real estate industry. This release may be obtained by calling the PR Newswire fax-on-demand service at: 1-800-758-5804, ext. 601633. Also, it is available under NAR releases on the Internet at http://www.realtor.com or http://www.prnewswire.com.
SOURCE National Association of Realtors