• Log In
• Register

I received a letter in the mail recently concerning my escrow1 account on my home loan, currently owned by Wells Fargo Home Mortgage.2 The first page of the letter contained good news: I was getting a refund of some surplus escrow money. The second page, which I nearly filed away without reading in detail, seemed to contain more good news. The title across the top in all-caps was:

Save money, huh? I read on.

Private Mortgage Insurance

The notice was about private mortgage insurance4 (PMI), a premium paid monthly to a lender in order to cover the risk of the borrower defaulting on the loan when less than 20% is put down. According to Texas state law, a borrower has the right to cancel this payment once the remaining principle balance of the loan is 80% or less of the current market value of the home.5 According to federal law (the Homeowners' Protection Act),6 it can be canceled the date the remaining principle balance of the loan is first scheduled to reach 80% of the original value of the property, or the date the principle balance actually reaches 80%. There are also stipulations including requirements for a good payment history and no subordinate liens. According to Wells Fargo's official declaration, PMI can be deleted when:7

1. You have had no 30-day late payments in the last 12 months and your loan is paid current with no past due payments owed.
2. Your loan has aged at least two years, but less than five years.
3. Your loan has met the required LTV ratio based on one of the following options:
   1. Order an appraisal showing the value of the structural improvements made to the property. If the improvements are the sole reason for the increased value of $[A+B], your LTV will be 80% and the appraisal can be used to delete PMI. The appraisal must specify the improvements made and the value of the improvements must equal $[B].
   2. If you have not made structural improvements to your property, an appraisal or Broker's Price Opinion (BPO) can still be used to lower your LTV. The LTV you will need to acheive is 75%, which means the appraised value must equal $[A+C].
   3. Reduce your principle balance to an 80% LTV by sending a payment of $[D].

Note I've replaced the dollar amounts with the following variables:

• A - the existing value of the home
• B - the amount that if added to the home value would raise the LTV to 80%
• C - the amount that if added to the home value would raise the LTV to 75%
• D - the amount that if reduced from the loan remaining principle would raise the LTV to 80%

The requirements do not end there. The Wells Fargo document emphasizes in multiple places, "The appraisal/BPO must be ordered through Wells Fargo Home Mortgage PMI Department." Also, structural improvements are limited to, "Adding a garage, deck, living space, in-ground pool, fence, in-ground sprinklers, finishing a basement, or remodeling living space." Items such as "new siding, new roof, new paint, new carpet, new flooring, landscaping" are specifically listed as not being qualified home improvements.

The Wells Fargo application form for an appraisal8 lists the cost at $350 for most states, and the separate form for ordering a BPO9 specifies $150. While initially taken back by these, it was easy to see how the costs would be quickly recovered by not having to pay PMI, which runs over $100/month on even very modest loans.

Additionally, on the date the principle balance of your loan is first scheduled to reach 78% of the original value of the property, PMI is said to be automatically terminated (as long as the borrower is up to date on loan payments). PMI is also always canceled at the midpoint of the amortization period of the loan. Lastly, only loans obtained after 07/29/1999 are covered by this federal law.

Sales Price vs Appraised Value

Intrigued (and somewhat overwhelmed) by this large chunk of mortgage jargon, I pulled out the Uniform Residential Appraisal Report (URAR) which was filed when I first bought my home to try and make some sense of things. First, I looked up my outstanding loan principle online and then divided it by the appraised home value I found in the URAR. Oddly enough, I was already under 78%, which left me wondering why my PMI wasn't already canceled. Every month PMI continued to cost me over $100, so I decided a call to Wells Fargo Home Mortgage was in order.

First, I spoke to Belinda, who had a kind voice and seemed to be helpful, but also had a tendency to speak over me. She informed me I was "very close," but I would need to pay for an appraisal to show my home had increased in value in order to meet the needed ratio. I didn't get it; my calculations already showed me to be below the automatic cutoff LTV.

Next, I spoke to Dianne, who had a less kind voice and didn't seem to make as much of an effort to be helpful. (The talk-over-the-customer trend continued, however.) During the course of our discussion I was able to determine Wells Fargo was using my original loan amount rather than my original appraised amount in order to determine the ratio. As my home was purchased at a price lower than the appraised value, Wells Fargo's method was resulting in higher LTV ratios and, consequently, my PMI had not been canceled. In my mind, this was an error. I expected not only my PMI to be canceled, but a refund of the money paid after the date the principle balance of my loan was first scheduled to reach 78% of the original value of the property. Diane wasn't so inclined.

Unable to reach an agreement, I had to seek more reliable and communicable information. Having family members in the mortgage industry,10 I investigated on my own. The answer, it turns out, was surprisingly simple. As a letter later received from Wells Fargo11 explained, "The LTV (loan-to-value) ratio is determined by dividing the current principle balance... by either the original property value or purchase price, whichever is lower" (emphasis added).

That changes things.

Lower Monthly Payment, Higher Cost in the End

My attention turned from the ineptitude of the Wells Fargo customer service staff to the injustice of the system in general. If using the lower of the two values on the appraisal was keeping me from canceling my PMI payment, it was costing me money - hundreds of dollars, in fact.

I brought up my loan activity online and tracked my outstanding principle balance progress. Using the (higher) original appraised value, I would have reached the automatic cut-off ratio of 78% on March 1, 2007. Using the diminished value, this would not occur for almost another nine months - and this even took into account the extra principle I pay each month! If I wasn't participating in an equity enhancement program, it would take me almost 28 months longer to reach the automatic cut-off date because of the law-granted latitude to lenders. Given I pay $109 per month for private mortgage insurance, this ensuing damage adds up to nearly $1000 in the former case and over $3000 in the latter. Unacceptable.

To be fair, however, I needed to consider the higher PMI monthly payment that would result from a higher home value. Using an online calculator,12 I found the PMI monthly payment was directly proportional to the loan amount. Given my current situation, (sales price)/(original appraised value) = .9375, so I divided my current PMI payment by the same factor to determine what I would be paying monthly for PMI if the lender had used the appraised value instead of the sales price: $109 / .9375 = $116.26. Taking the monthly difference ($116.26 - $109 = $7.26) and multiplying by the number of PMI payments I had made (40) resulted in a total cost increase of about 40 * $7.26 = $290.40. This was less than a third of the extra $1000 with which I was hit due to the delayed cancellation date. Thus, the monthly payment was less using the sales price instead of the appraised amount, but the total amount paid ended up being more because the lower payments continued longer.

To investigate this further, I laid out my entire amortization. My rough calculations above were confirmed: If the law was changed to specify the lender use the larger of the two values for PMI calculations, my monthly payment would have been higher, but I would have reached the cut-off point faster and saved money in the end. Disregarding any extra principle payments, the effect this law change would have on a loan and appraisal similar to mine would be:

• $7 higher monthly payment
• The opportunity to cancel PMI after 94 months and $10,929.10 total paid to PMI, as opposed to 121 months and $13,189.00.
• An automatic PMI cancellation after 105 months and $12,208.04, as opposed to 130 months and $14,170.00.

Given the above, it is clear anyone trying to ascribe the current legislation as being on the side of the borrower due to the lower monthly payment should be told to "stick it in their outstanding balance to original appraised value ratio."

Take that.

Advised Action

We now know how PMI works and we know it provides a chance to save a borrower hundreds, if not thousands of dollars. Time to take action.

If you pay PMI, be aware of what it will take for you to cancel it. Your lender should be able to provide you with the information you need, but be sure to have a good knowledge of the general process before you call.

Once you know your situation, determine if you need an appraisal. If you think your home will appraise for a higher value than is currently being used by your lender to calculate your LTV, and you suspect this higher value would allow you to cancel your PMI payments earlier, do not delay. Have the appraisal done early and remember the appraisal usually must be done by the lender's PMI group. The $350 price tag may seem exorbitant, but this is covered easily by being able to stop PMI payments just a few months earlier. Contact your lender as soon as you realize an appraisal is necessary to get the process started.

Of course, if you are very close to reaching 80% already, it may be too late for an appraisal to do any good. This is the situation I found myself in upon writing this article; my normal payments were set to bring me below 80% LTV in three months, so I only had $327 PMI left to pay, making it impossible to make up for the $350 appraisal cost. If I had only read something like this article earlier (and if my house would have appraised like I expected it to), I could have stopped my PMI payments 20 months earlier, saving me over $2,000.

After your LTV accurately represents the value of your home (i.e., is lowered as much as possible), you still need to contact your lender to actually cancel PMI when you reach 80%. Otherwise, the payments continue until you reach 78%. It is likely the lender will have a form for you to fill out, and may even require a written statement. Be sure to send this in early, but not too early. As PMI is charged for the previous month, the lender needs the statement requesting PMI be canceled after their records show a LTV of 80% or lower, but delay too far after that point and you risk having to pay for another month.

Lastly, if you haven't found enough incentive to start an equity enhancement program - or at least pay some extra principle every once in a while - add "faster PMI cancellation" to your list of items in the "plus" column. The faster your principle drops, the faster you can cancel PMI and cut your monthly payment by that amount. In my case, additional principle payments will allow me to cancel my PMI 80 months sooner (month 41 rather than month 121), resulting in savings of nearly $9000.13 The saved PMI money can be invested or even applied to principle to save money on interest, further increasing the benefit.

Summary

It seems clear the key in all of this lies in mortgage awareness. If you pay PMI, be aware of the figure used by your mortgage company to determine when to allow PMI cancellation. Take whatever reasonable actions you can to cancel your PMI early, including appraising your home, paying additional principle, and contacting your lender promptly with the appropriate correspondence. Doing so could save you thousands.

Discuss this Article

Have an opinion, a question, or correction? Leave comments for this article in the discussion area.