Real estate mortgages are secured by a very valuable asset; the home itself. If a borrower defaults on a loan, the risk to the lender is difference between the outstanding loan amount and the value of the home, minus the cost to foreclose and resell the property.
This is why lenders were wary of lending more than 80% of a home’s value in the past; the 20% cushion helped ensure them against loss. However, it’s become common to see homebuyers using down payments of 10, 5 or even 0 percent. This increases the risk factor of the loan, and to offset that lenders now require Private Mortgage Insurance (PMI) be paid by the borrower when the loan amount exceeds 80%.
PMI has been a money-maker for mortgage companies. The amount of the insurance (often $40 to $50 per month on a $100,000 house) is rolled into the mortgage and is often overlooked or forgotten by the homeowner.
Although the loan amount will eventually dip below 80%, that will take quite a while on a thirty-year mortgage. But there are other ways for your equity level to get past the 80/20 ratio; appreciation in the real estate market, and/or an increase in value due to renovations and upgrades.
The hardest thing is for a homeowner is to know when their equity has risen above the magical 20% mark. Our company offers a specific service to establish the value of your home and help remove PMI payments if the value ratio is there. Faced with the data in our reports, most mortgage companies will eliminate the PMI with little trouble.
The savings from dropping the PMI will cover the cost of the appraisal in a matter of months, and you can enjoy the savings from that point on!