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Home Equity - Let the Market Eliminate Your Private Mortgage Insurance
In decades past, most people who were interested in obtaining a home loan were required to put down at least 20% of the purchase price. Those days are gone, and as home prices have risen faster than incomes, the average down payment required by lenders has dropped. In fact, it is often possible to buy a home with no down payment at all. Nationally, the average down payment is a 3%. It's nice to be able to buy a home with such a small amount of ready cash, but there is a downside - if the down payment is less than 20%, the lender requires that private mortgage insurance (PMI) be added to the house note.
No one likes to pay PMI; the payment doesn't go towards paying off the house and the payments aren't tax deductible. And the PMI payments aren't trivial; the monthly PMI payment on a home priced at the U.S. median price of $206,000 with a 3% down payment is $129. Lenders require that borrowers pay PMI until the borrowed amount becomes less than 80% of the value of the home. In years past, this has meant that homeowners had to pay PMI until they had paid enough of the loan balance to reduce the debt to less than 80%. Times have changed, however, and many homeowners may be eligible for a faster way to avoid the monthly PMI payments.
The exploding real estate market has driven home prices higher than ever. Not only are the prices high, but the rate at which they are increasing is astonishing. In some parts of the country, home prices have doubled or even tripled in the last five years alone. The savvy homeowner should keep an eye on the price of housing in their local market, as the equity in his or her home may rise above 20% through market appreciation alone. In most markets, this is often happening quickly enough that homeowners may be able to eliminate PMI less than two years after purchase, even if they put a minimum amount of money down on the home.
A home appraisal is required to establish the equity to debt ratio of the loan, and this typically costs several hundred dollars. As that figure represents only a few months' PMI payments, most everyone would be glad to pay for an appraisal. Before doing so, contact your lender, as some lenders require PMI for a specific length of time before it can be dropped. No one likes to pay for private mortgage insurance, and thanks to an unusually aggressive real estate market, few homebuyers today should have to pay it for very long.
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Charles Essmeier is the owner of Retro Marketing, a firm devoted to informational Websites, including End-Your-Debt.com, a Website devoted to debt consolidation and credit counseling information and HomeEquityHelp.net, a site devoted to information on mortgages and home equity loans.
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