Home LoansMortgageUnderstand Mortgage Down Payments and PMI

How to Cancel Private Mortgage Insurance (PMI)

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In today’s real estate marketplace, many prospective homebuyers struggle to come up with the recommended 20 percent down payment. Fortunately, many loan programs make it possible to buy a home with less money down. While these loans make homeownership more accessible, they often come at a cost: private mortgage insurance.

Purpose of private mortgage insurance (PMI)

Private mortgage insurance (PMI) is a type of insurance policy that protects the lender if you stop making payments on your loan.

If you stop making payments and the lender is forced to foreclose on your home, the home may not be worth enough to cover the outstanding balance on your mortgage plus the lender’s costs — that’s where PMI comes in. If the home sells for less than the remaining principal balance, PMI will pay the lender the difference. For example, if the mortgage balance is $230,000 and the property sold for $210,000, the PMI will pay the bank the $20,000 difference.

PMI is typically required when you make a down payment of less than 20 percent of the home’s purchase price. You might pay PMI as a lump sum at closing, a monthly premium added to your mortgage payment or a combination of the two.

The cost of PMI varies based on your loan-to-value ratio and your credit score, but typically costs between $30 and $70 per month for every $100,000 borrowed. So if you take out a $225,000 home loan, PMI may add an additional $67.50 to $157.50 per month to your mortgage payment.

That may not seem like much compared to what you’ll pay toward principal and interest each month, but those extra payments really add up to a lot of money over time — especially when you consider PMI is designed to protect the lender, not the homeowner. The good news is federal law provides the right to cancel PMI for many mortgages under certain circumstances.

How to cancel PMI

The Homeowners Protection Act of 1998 (HPA) provides three ways for homeowners to stop paying PMI:

Request PMI cancellation

When the principal balance of your home loan falls to 80 percent of the original value of your home, you can request your mortgage servicer to cancel PMI. If you make all your scheduled payments without paying any additional principal, this is the date indicated on the PMI disclosure form you received at closing. You can also contact your servicer to inquire about the date if you can’t find the form.

If you make extra principal payments, the balance of your mortgage may reach 80 percent of the original value of your home sooner than indicated on the PMI disclosure form.

To illustrate, say Brian bought a home on July 1, 2018, for $320,000 with a 3 percent down payment. His original loan amount was $310,400 (97 percent of $320,000) for a 30-year fixed loan with an interest rate of 4.529 percent.

If Brian doesn’t make any extra principal payments, in August 2027 his principal balance will fall below $256,000 (80 percent of $320,000). At that time, Brian can request his loan servicer cancel the PMI.

However, if Brian makes an extra principal payment of $150 per month starting with his first monthly payment, he can request PMI cancellation more than two years earlier than the date shown on the PMI disclosure form. In that case, the loan balance would fall below $256,000 in July 2025.

However, there are a few other criteria you must meet to cancel PMI on your mortgage:

  • You must make the request in writing
  • You must have a good payment history and be current on your mortgage payments
  • The lender may ask you to certify that there are no junior liens or second mortgages on the home
  • The lender may require an appraisal to verify the value of the property hasn’t fallen below the original cost. If the value of the home has fallen below the original purchase price, the lender may deny a request to cancel PMI.

Automatic PMI termination

If you do not ask your servicer to cancel PMI, your servicer must automatically cancel PMI on the date when your principal balance is scheduled to reach 78 percent of the original purchase price of your home. The lender will only terminate PMI on this date if you are current on your payments.

Final PMI termination

For some mortgages, the principal balance will not reach 78 percent of the original purchase price until well after the midpoint of the loan’s amortization schedule. This may occur when the mortgage has an interest-only payment period, goes into principal forbearance or requires a balloon payment. In this case, the servicer must terminate PMI the month after you reach the midpoint of your loan’s amortization schedule, regardless of whether the principal balance has reached 78 percent of the purchase price. You must be current on your payments for the servicer to terminate PMI.

Keep in mind that these are only the rules outlined by the HPA and the law applies only to single-family principal residences that were purchased after July 29, 1999. Lenders or mortgage-backers like Fannie Mae and Freddie Mac may have their own PMI cancellation guidelines, although they cannot supersede a borrower’s rights under the HPA.

Other ways to eliminate PMI

There are a few ways to reach PMI cancellation levels quicker.

Increase in value

“With values climbing so much now, many loan servicers will allow a borrower to get a new appraisal and have the LTV calculated off the new appraised amount,” said Hayden Binkerd, a loan officer with Guild Mortgage Company in Portland, Ore.

However, to cancel PMI earlier based on appraised value, the lender may require borrowers to wait two to five years. This is referred to as “seasoning” of the loan, and it is designed to ensure that your loan has been in good standing for a reasonable amount of time before canceling PMI.

“If someone wants to go that route, check with the servicer of your loan and make sure to use an appraisal company that the servicer approves and that there are no seasoning requirements that go with removing PMI with a new appraisal,” Binkerd said.

However, even if your servicer requires a five-year seasoning period, you may be able to drop PMI — and save a significant amount of money on PMI premiums — by requesting the servicer cancel PMI based on a new appraisal.

Returning to the example above, say the home Brian purchased in July 2018 increased in value to $384,000 over the next five years. If Brian didn’t make any extra principal payments during that time, by August 2023, the principal balance of his loan would be $282,569. Relying solely on paying down the principal balance to 80 percent of the home’s purchase price, Brian would have to wait four more years to request PMI cancellation.

Instead, Brian could discuss getting PMI canceled based on the appraised value. With an appraised value of $384,000 and a mortgage balance of $282,569, Brian’s loan-to-value would be well below 80 percent. As long as he has an acceptable payment record, is current on his loan payments and meets other requirements outlined by the lender, his servicer may cancel his PMI upon his request and save four years’ worth of monthly PMI payments.

Improvements

Making improvements to your home can also increase the value and help you get rid of PMI faster. Loans backed by Fannie Mae may waive the minimum two-year seasoning requirement if a borrower makes improvements that increase the value of the property, bringing the loan-to-value ratio to 75 percent or less.

For example, say the $320,000 home Brian purchased was a fixer-upper in a highly sought-after neighborhood. After buying the home, Brian immediately adds a deck, finishes the basement and remodels the outdated kitchen and bathrooms, bringing the value of the property up from $320,000 to $460,000.

Brian could get an appraisal on the home and may be able to have PMI canceled based on the improved value of the home.

Refinance

Another way to eliminate PMI is to refinance the mortgage. If the value of the home has increased substantially, a borrower may be able to refinance the mortgage with the same lender or a new lender without requiring PMI.

However, it’s important to consider whether the cost of refinancing will outstrip the potential savings from eliminating PMI. You can run the numbers using LendingTree’s Refinance Calculator.

Refinancing to a conventional loan may be the only way for FHA borrowers to eliminate mortgage insurance (the FHA’s version of PMI). The HPA does not apply to FHA loans. Mortgage insurance on FHA loans dated on or after June 3, 2013, can only be eliminated when the mortgage is paid in full, so borrowers may benefit from refinancing from an FHA mortgage to a conventional loan.

Bottom line

Canceling private mortgage insurance may require you to jump through some hoops. Whether you need to pay for an appraisal or send a letter to your servicer requesting it remove PMI from your loan, it’s a good idea to get it removed as soon as possible. An appraisal may cost anywhere from $250 to $450 depending on where you live and the size and condition of your home, but that’s a small price to pay if you can stop making monthly payments years earlier than scheduled.

 

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