The Upside and Downside of Rising House Prices

A couple of months ago, I noted that the housing market had a problem: there were too few homes for sale. Persistently low inventory means that there are a lot of frustrated would-be buyers out there, spending weekends at open houses. It also has led to home prices continuing to rise at a more than six percent clip from a year ago.

Adding to the pressure for homebuyers is the fact that mortgage rates increased to a seven-year high of 4.8 percent in April, pushing the National Association of Realtor’s mortgage affordability index to its lowest level since the end of 2008. Even with prices and mortgage rates up, many still want in on the housing market, because they are worried that increases will persist or renting has become less affordable.

Of course, as rates rise, refinancing becomes less compelling. Refinancing activity has slowed down to near ten-year lows, but there may be other ways for current homeowners to save a few bucks. For those who purchased properties with less than 20 percent down, now is a great time to see if you can eliminate your Private Mortgage Insurance (“PMI”).

PMI acts as an extra layer of protection for the lender if you stop making payments on your loan. Many don’t focus on PMI after the closing because premiums are usually added to the mortgage payment. But with prices up, there could be a good opportunity to find extra money.

To remove PMI, you need to demonstrate that you have at least twenty percent equity of the original value of your home. “Original value” generally means either the contract sales price or the appraised value of your home at the time you purchased it; whichever is lower (or, if you have refinanced, the appraised value at the time you refinanced). The equity in your home could have increased due to prices rising; if you have made additional payments that reduce the principal balance of your mortgage to 80 percent; or a combination of both of those scenarios.

When the mortgage balance drops to 78 percent, the mortgage servicer is supposed to automatically eliminate PMI, but that does not happen as quickly as many would like. (For my math-challenged pals, to calculate whether your loan balance has fallen to 80 percent or 78 percent of the original value, just divide the current loan balance (the amount you still owe) by the original appraised value (most likely, that’s the same as the purchase price).

To speed up the PMI removal process, the Consumer Financial Protection Bureau notes that you must meet these requirements:

• The cancellation request must be in writing.
• You must be current on your payments and have a good payment history.
• You might have to prove that you don’t have any other liens on the home (for example, a home equity loan or home equity line of credit).
• You might have to get an appraisal (costs vary, but usually about $500- $700) to demonstrate that your loan balance isn’t more than 80 percent of the home’s current value. Before shelling out this dough, confirm with the lender whether or not it is necessary or helpful in the process.

For those who have Federal Housing Administration (FHA) loans, the process for removing mortgage insurance is different than for conventional ones. Your best bet is to contact your lender and ask them what they require to drop the insurance. As a reminder, FHA loans are available to borrowers with FICO scores of at least 580 and require as little as a 3.5 percent down payment.