There’s a lot of confusion about how to get rid of private mortgage insurance or PMI.
Many homeowners overpay PMI for years because they don’t understand the rules for canceling it.
On a $200,000 mortgage your PMI could cost $2,000 per year. That’s serious money that you should be saving or investing for your future, instead of handing over to a lender.
I received this question from Tim N. in McHenry, IL:
I’m having a hard time getting legitimate information on how to cancel my PMI. A lot of what I read says that PMI can be cancelled when you reach 80% of the original loan value, and at 78% it must automatically removed by the lender. If that’s true why does the lender require an appraisal?
What is PMI?
PMI is a special kind of insurance that lenders require you to purchase when you get a mortgage that’s more than 80% of the home’s value.
For example, if you buy a home for $200,000 and put down less than a 20% down payment ($40,000), you would have a PMI premium tacked on to your monthly principal and interest payment–regardless of your credit score.
Lenders make you pay PMI because they consider a loan with less than a 20% down payment somewhat risky. Your payment for PMI covers the cost of mortgage insurance they purchase, which gives them some protection in case you default.
How Much Does PMI Cost?
The cost of PMI varies depending on the type and term of your mortgage. It could range from 0.5% to 1% of the mortgage amount per year.
For a $300,000 home that you made a 10% down payment ($30,000) and financed $270,000, your PMI premium could cost anywhere from $100 to $225 per month.
Your Rights for Getting Rid of PMI
Once you pay a mortgage down to a certain balance, you have the right to get rid of PMI according to the Homeowner’s Protection Act (HPA) of 1998.
There are 3 ways to get rid of PMI:
Way #1: Cancellation
You can request cancellation of PMI when you pay down your mortgage so it equals 80% of the original purchase price or appraised value of your home at the time you bought it, whichever is less. However, you can’t be more than 30 days late making a payment within the past year or 60 days late within two years.
Your lender has the right to require evidence that the value of the property has not declined below its original value and that you don’t have a second mortgage, such as a home equity loan or line of credit. That’s why lenders will require you to pay for a property appraisal.
Way #2: Automatic Termination
On most mortgages, your lender must automatically cancel PMI once you pay it down to 78% of the original value, if you are current on your loan. For high risk mortgages, lenders must automatically cancel PMI once the balance reaches 77% of the original value of the property, provided you are not behind on payments.
Way # 3: Final Termination
PMI must be cancelled when the mortgage reaches the midpoint of the amortization period, if you are current on payments. For example, on a 30-year loan with 360 monthly payments, the midpoint would be after 180 payments.
Who Qualifies to Cancel PMI?
Watch out for the following situations where you might qualify for a PMI cancellation and not know it:
- If the value of your home has risen, which would reduce your loan-to-value ratio or LTV. (Even though the majority of homes have declined in value over the past several years, your home may have risen in value when compared to its original purchase price.)
- If you remodeled your home and the improvements increased its value, which may have reduced your LTV.
- If you paid down your mortgage by sending extra payments, which may have reduced your LTV.
Here’s an easy way to do the math: Multiply your current mortgage balance by 1.25 to find out the minimum market value your property would have to appraise for in order to have an 80% LTV.
For example, if your current mortgage balance is $100,000, your home would have to appraise for $125,000 ($100,000 x 1.25) to qualify for a PMI cancellation.
Different types of loans can have different PMI cancellation exclusions. So if you believe your mortgage is at or below an 80% LTV, call your lender right away to discuss your rights for a PMI cancellation!
Related Content: FAQ on the Mortgage Interest Deduction (VIDEO)
Other Ways to Reduce Your Mortgage Payments
If you won’t be eligible to eliminate PMI from your mortgage for a while, refinancing your loan could be a smart option to lower your monthly payments.
Right now mortgage rates are as low as 2%. If that’s lower than what you’re currently paying, be sure to get a free rate quote and save money on your mortgage that you can put to better use.