If you have the standard Private Mortgage Insurance (PMI), you’ll pay it every month when you make your mortgage payment. This will make your monthly payment higher than usual. The good news is, you don’t have to keep it forever. This article will teach you how to remove PMI in your home.
What is PMI
Lenders usually need personal mortgage insurance if you are putting less than 20% on your home. They take more risks and want to be protected. But it’s not like other types of insurance.
That’s because this type of borrower-paid PMI is the Lender If you can’t make your mortgage payments, you can’t. But they Pay each month as part of your monthly payment.
Why Remove PMI? In short, it can cost you a lot of money. So that’s a good reason to remove PMI early if you can.
(This money could help you pay off your mortgage faster, for example.)
There are rules that can help you with this.
The Homeowner Protection Act
Some of the ways to dump PMI are set out in the Homeowners Protection Act of 1998. The HPA is a federal act also known as the PMI Cancellation Act.
The law came into force on July 29, 1999. Before that, there weren’t many protections in place for those wanting to cancel PMI for the house they live in.
The law applies to owners of single-family houses where the house is their primary residence. (Note that condos, townhouses, cooperatives, and mobile homes are also considered single-family homes for the purposes of the law.)
It does not apply to FHA or VA loans. (FHA mortgage insurance premiums, or MIP, are not the same as PMI, although they serve a similar purpose.)
How to Get Rid of PMI
According to the law, there are three main ways to get rid of PMI. You can do this via:
- Borrower Inquiry
- Automatic termination
- Final termination
Finally, you may be able to refinance to remove PMI. So this is a fourth way of doing this. If you have a high risk or non-compliant loan then only the last two methods can be used.
Let’s talk about each of the above methods one by one.
1. Borrower’s request for PMI cancellation
That’s what it sounds like. You write to your mortgage company asking them to remove PMI. You have to do this as long as you meet certain requirements.
To qualify, you must:
- have a good payment history
- Be current on your mortgage
- meet one of the LTV (loan-to-value) requirements
If your mortgage papers so require, you may also need to demonstrate that the property has not fallen in value and confirm that there are no subordinated mortgages.
The requirements for the loan-to-value ratio
There are two ways to accomplish this so that you can request an early cancellation. The requirement can be based on its original value (the value of the home when you bought it) or its current value (the value it is now). This can be complex so there is a flowchart that after the explanations can be helpful.
If you go with the original valueneed a loan-to-value ratio of 80% or less. In other words, the amount you owe on your loan must be 80% or less of your purchase price or what the home estimated when you bought it. (Whatever is less.)
To find out, look up how much you paid for the house and how much it valued on your loan records. Then ask your mortgage lender how much you owe for it now and do a little math to find out the LTV. (Later more.)
If you go with the current valueneed a new appraisal that can cost you a few hundred dollars. But don’t hurry and get another one. First, speak to your lender to make sure they don’t need to take any further steps. Also check the values of comps in your region. (A real estate agent can help you get comps.)
The LTV you need for the current value depends on when you received the loan: When you received the loan:
- Less than 2 years ago, you may be able to get rid of PMI if your mortgage lending value is 75% or less. However, the increased value must be due to improvements that you made.
- 2-5 years ago, the PMI can be cleared if the LTV is 75% or less based on the rating.
- 5 or more years ago, the LTV only needs to be 80% or less based on the valuation.
These last two bullet points can help you cancel the PMI if your home value increases.
Here is the same information in flowchart form:
How to find your loan-to-value ratio
You need to know the balance of your loan and the value of your home. Depending on which method you use, the value of the house can be either its current value or the value of the house when you bought it.
Once you know that, the loan-to-value ratio is calculated as follows:
Loan Balance ÷ Value = Loan to Value
For example, suppose you paid $ 200,000 for your house and you now owe $ 160,000 for it. You would put these numbers in the formula:
Loan Balance ÷ Value = Loan to Value
$ 160,000 (what you owe) ÷ $ 200,000 (what you paid) = 0.8
Since .8 is another way of saying 80%, you can write to ask the lender to cancel the PMI based on the original value.
Here is another example. For example, suppose you now owe your home $ 183,260 and you bought it 4 years ago. Today it is estimated at $ 238,000.
The formula of $ 183,260 (what you owe) ÷ $ 238,000 (the current estimate) = 0.77, or 77%.
In that case, you would not qualify yet because you bought the house 4 years ago and the quota is more than 75%.
2. Automatic termination method
As the name suggests, this method doesn’t require you to do anything special to remove PMI.
This means that the PMI ends when the mortgage balance reaches 78% of the original home value. (As long as your mortgage is up to date.) You can determine when this will happen by looking at the amortization schedule or by asking your loan servant.
If you are out of date and reach this point, it will end on the first day of the first month after you became up to date.
3. Final termination method
This third way of exiting PMI comes into play when the first two haven’t already happened. In this case, the loan servicer will need to cancel the PMI once you are halfway through the mortgage period.
This is most likely when you have an interest-only loan or a large balloon payment that falls due late in the loan.
For the final termination method to work, the loan must be current. If you are out of date and have reached this point, it ends on the first day of the first month after you became up to date.
4. Refinance to Get Rid of PMI
With this last method, you can get rid of PMI as a side effect of refinancing.
Unless you’re lucky enough to get a real free refinance (which is rare) just as a way to get rid of PMI may not be worth it. That’s because there are fees and closing costs. So you need to check whether or not you are ahead of the curve.
However, refinancing at a lower interest rate can be a way to save money, especially if you can upgrade to a shorter term as well. (Like a 15 or 20 year loan.)
And if your new loan doesn’t require a PMI (since it is less than 80% of the value of your home), this is another way to save. It gets rid of PMI on your old loan because you no longer have the loan.
What if you have trouble removing the PMI?
The first three methods are stipulated by law. If you qualify for any of these options but are having trouble removing the PMI, see if you can speak to a manager at your loan service provider.
Remember that you must request this in writing.
If the chain doesn’t work further up, contact the Consumer Financial Protection Bureau (CFPB). You can fill out the complaint form here. They can help you exercise your PMI rights.