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<< Previous   of   Next >>   ADVERTISEMENT   CONTACT THE HERALD Mike Benbow, Business Editor benbow@heraldnet.com   Published: Sunday, November 18, 2007 Tough to get out of mortgage insurance By Steve Tytler Question: We purchased our home in July with a significant down payment, but less than the 20 percent (particularly after closing costs) required to avoid mortgage insurance. The lender required an appraisal for closing, which came out $17,000 higher than our purchase price, or instant equity. Since closing four months ago, we've also paid further toward the principal loan balance. Our initial down payment, extra principal payment and instant equity of that appraisal equal more than 20 percent of the purchase price. Can we cancel the mortgage insurance? D.W., Lake Stevens Answer: The short answer is no. Now let me explain why. The instant equity that you say you have is not relevant to the discussion. As any appraiser will tell you, there is not such thing as an exact number that a home is worth. Appraisers look at recent sales of comparable homes, called comps in the trade, in your neighborhood. They make adjustments for things such as differences in square footage, number of bedrooms and bathrooms, the condition of the homes and a variety of other factors. After adjusting for the sales prices of the comps in you area, the appraiser comes up with a value for your home. Depending on how liberal or conservative the appraiser is in making his or her adjustments, the appraised value of a home can vary by thousands of dollars, or even tens of thousands of dollars, from one appraiser to another. So the fact that the appraiser who did the appraisal for your purchase mortgage came in with a higher value than what you actually paid for the home makes you feel good, it doesn't really mean anything. There's an old saying in real estate that a home is only worth whatever somebody is willing to pay for it. That's why mortgage lenders disregard appraisals that come in above the purchase price of the home. As far as they are concerned, your house is worth what you paid for it. Period. So I'm sorry to say that your instant equity does not exist as far as your lender is concerned. Pre-paying the principal balance of your mortgage does increase your equity in the home. So every $1,000 reduction in your mortgage loan balance increases your equity in the property by $1,000. Now here's the bad news: Most mortgage insurance policies require you to pay the insurance for a minimum of two years, regardless of how much equity you have in your home. But even if your mortgage insurance policy does not include the two-year rule, most mortgage insurance companies will require you to wait at least six to twelve months after the closing date of your purchase loan before they will accept an appraisal for a value higher than your purchase price. And if the new appraised value is significantly higher than your purchase price, the lender will typically require extensive documentation to prove that home values in your area are really increasing (as they did during the recent housing boom) and that the higher value is not just the product of a very aggressive appraiser. Now some more bad news: Home prices are expected to fall over the next year or two because the inventory of homes for sale is increasing dramatically and home buyer demand has been dropping. That makes it a buyer's market and home sellers are forced to reduce their asking prices in order to make their home more attractive to prospective buyers than the competition. That means that the price of the comparable home sales in your neighborhood will go down, which will in turn reduce the appraised value of your home next year. So even if you continue to pre-pay the principal on your mortgage balance, your home will likely appraise for less than what you paid for it, and it will be impossible to accumulate the 20 percent equity position that lenders require to drop the mortgage insurance coverage. I'm sorry to be the bearer of bad news, but that is the reality we all face in the housing market slowdown. Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206 or e-mail him at economy@heraldnet.com.

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