What’s your PMI Status? Are you still paying? Is it necessary?

These days, down payments can vary from 50% down all the way down to 5%. When you get to the 20% or less, you would be required to pay PMI or Private Mortgage Insurance. As time goes by and the market continues to sizzle, this might be temporary and you can actually change your monthly payment for the better.

Private Mortgage Insurance (or PMI) is an extra charge that banks require when the amount of a loan someone takes out to purchase or refinance a home causes the loan to value ratio to exceed 80%. This means that the buyer or owner has less than 20% equity in the home. The bank requires PMI in the event the homeowner forecloses or the market shifts and the buyer has to do a short sale.

PMI can range anywhere from .3% to 1.5% of the original loan amount per year according to Bankrate.com. It is usually paid as a separate line item as part of the mortgage payment. The PMI rate can vary according to size of down payment, credit score, and insurer.

Here is an example of how PMI can be assessed (each situation may differ):

Purchase Price: $500,000
Down payment: $40,000
Loan Amount: $460,000 or 92% of the purchase price
Annual PMI Premium: $2,300 (.5% of original loan amount)
Monthly Premium: $191.66

If you have been paying an extra charge for PMI each month, this is likely a charge you would like to be rid of. The great news is that home values in Seattle have been on the rise. Since in a conventional loan, the PMI rate must be cancelled when the loan-to-value ratio (appraised value/loan amount) drops below 78%, the rise in home values should be helping your situation.

In our above example, let’s say the homeowner bought the home three years ago in Seattle. Median sales prices have increased 16.1% in that time and although an appraisal of some sort would be required to determine market value, let’s assume that market value for this property has indeed increased 16% since purchase. That would mean that three years of payments plus appreciation would cause the PMI to no longer be needed:

Loan Balance: $432,000
Appraised Value: $580,000
Loan-to-Value Ratio: 74.5%

In this case, the PMI may have already been cancelled. However, if you have been paying PMI, have been paying down your mortgage principal, and prices have increased to the point where you think you shouldn’t be paying PMI, it may be time to ask your bank to reassess the situation since banks may not be aware of what is happening in our local market.

FHA loans work a little bit differently—an entire refinance may be in order. However, rates are still low (but are expected to rise). You may have a narrow window in front of you where the benefits of refinancing may be worth the refinance!

If you would like to know how prices have appreciated in your area so you are ready to reach out to the bank, we would be happy to help. Please give us a call, text, or email: 206-762-0682 or sarahgc@cloudcityhomes.com and shelley@cloudcityhomes.com.  

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