Written by Ellen Jo Kraemer, Broker, Just For Buyers Realty.
Most mortgages today for which less than 20% was collected as a down payment charge a monthly premium for Private Mortgage Insurance, or PMI. This insurance protects the lender against the increased risks present when a home owner has little actual equity in the property. Premiums are based on the size of the equity deficit, and can increase your monthly payment substantially.
Once 20% equity is reached, however, PMI can often be dropped from the loan (not with FHA loans). There are two ways this can happen. The first is over time, when principal payments have been sufficient to reduce the loan below 78%, and your lender will automatically drop the PMI premium. The second way could happen sooner – if the property has increased in value, so that 20% equity has been reached through appreciation.
As an example of the second way, let’s say a property was purchased three years ago for $100,000 with a 5% down payment and a $95,000 loan to value—LTV. Now three years later, similar homes in this same community are selling for $115,000-$120,000. If the fair market value of your home has increased to $118,000 and your loan has been reduced below $94,400, you now have 20% equity!
Don’t wait for your Lender to point this out; he probably won’t. Call your Realtor and have a Comparative Market Analysis (CMA) run for your neighborhood. If recent sales support the increased valuation of your home, consider having a new appraisal performed (Your lender will have to order the appraisal and you will be responsible for paying for it. Home appraisals generally cost between $400 and $600). If the appraisal supports an increase to 20% equity, you could reduce your monthly payment significantly each and every month for the duration of your loan.
If you have questions on how to reduce your mortgage payments, contact Just For Buyers Realty at (910) 202-4813.