Private mortgage insurance
PMI is charged on conventional loans made with less than 20 percent down, and it protects the lender, not you. It costs roughly 0.3 to 1.5 percent of the loan each year, depending on your credit score and down payment, which comes to $75 to $375 a month on a $300,000 loan. Federal law provides two exits. You may request cancellation in writing once the balance reaches 80 percent of the home's original value, provided your payment history is clean, and the servicer must end PMI automatically when the scheduled balance reaches 78 percent. Extra principal payments bring the first date forward. Many servicers will also cancel after a new appraisal shows appreciation, so ask for their rules before paying an appraiser.
FHA loans work differently. They carry an upfront premium of 1.75 percent, usually financed, plus an annual premium that lasts for the life of the loan when the down payment was under 10 percent. The usual way out is to refinance into a conventional loan once you hold 20 percent equity.
Escrow
The servicer collects one twelfth of your annual property tax and insurance with each payment, holds it in an escrow account, and pays those bills when due. Once a year the servicer analyzes the account. If the tax bill or the premium rose, the account shows a shortage, which you may repay at once or spread over twelve months, and the monthly payment rises in either case to meet the new bills. This is how a fixed-rate payment climbs. Read the analysis each year, because servicers make mistakes.
Property taxes
The bill is the assessed value multiplied by the local rate, often quoted in mills, or dollars per $1,000 of assessed value. Effective rates run from under 0.5 percent to more than 2 percent of a home's value per year. Several traps await new owners.
- The listing shows the seller's tax bill. In many states the assessment resets to the sale price, so your bill may be far higher than that of a seller whose assessment was capped for years.
- A homestead exemption for a primary residence must be applied for, usually once, by a deadline early in the year.
- An assessment can be appealed, typically within 30 to 60 days of the notice, using three comparable recent sales or errors in the county's record of your house.
Tip Pull the county's property record for your house and check the square footage and the bathroom count. Errors are common, and correcting one is the easiest appeal there is.
