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Q & A With America’s Real Estate Professor: Cancelling Private Mortgage Insurance

Published:   |   Updated: December 19, 2013 at 10:09 AM

Cancelling Private Mortgage Insurance

Q. I bought a property 6 years ago and have private mortgage insurance. It’s actually up in value and I’d like to get rid of this expense, but my mortgage lender has refused. Help! Allan M., Raleigh, N.C.

A. It used to be a huge fight with lenders to get them to cancel PMI. It still is tough most of the time. The Homeowners Protection Act of 1998 gave homeowners a lot more rights to help them cancel PMI. That being said, there are still many reasons a lender can refuse and/or make it difficult.

The first issue is that your property’s loan-to-value generally must be below 78-80 percent. And that could include any second mortgage or HELOC. You must also be up to date on your mortgage. The lender may also require you to have an appraisal done for about $400 and if it doesn’t appraise you’re out that money.

If your lender has refused, get them to give you a written explanation and review that against the Protection Act information. Search online for more details.

If you think they should allow you to cancel, and they won’t, you might want to contact the bank’s legal department as a start and give them a written letter as to why you believe they should let you cancel PMI. Hopefully that will solve the issue. If it doesn’t, and you’re not happy with their response because you feel your property is qualified, you may have to hire an attorney to pursue your case. Good luck.

Short Term Rentals

Q. Many investors I know in the city are considering buying properties to rent as short-term rentals. I was wondering if you know if these can be good investments? Marge I., Washington, D.C.

A. Any property can be a good investment, but it’s unlikely a short-term rental is going to be one. There are several issues.

One issue is prices too high and net rents too low. In order to generate high rental income, you typically need to have a really good location. And with a really good location, comes a really high price and big mortgage.

So do the rents, less expenses, cover the mortgage and leave some cash left over is what you’d want to know. And the answer is probably not. Expenses on short-term rentals are like hotel expenses where 65-85 percent of revenue goes to operating expenses – a normal rental property’s expenses are typically half that amount. That leaves only 20-40 percent of the rental revenue to cover the mortgage, so you’re probably going to be negative on cash flows.

And any property with negative cash flows is probably not a very good investment, but talk to a financial advisor.

In addition to that, they are very management intensive. So management fees are very high 25-30 percent and if you want to self-manage, it’s a full time job. And you won’t have fun when every issue is an emergency!

Lastly, there are probably many new city rules and regulations coming on short-term rentals. Some HOAs ban them and some neighbors fight them.

I doubt the above sounds appealing to you. But talk to other investors for their guidance and opinions.

Leonard Baron, MBA, is America’s Real Estate Professor®. His unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University lecturer, blogs at Zillow, and loves kicking the tires of a good piece of dirt! More at ProfessorBaron.com. Email your questions to: Leonard@ProfessorBaron.com

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