If you paid less than 20% down payment on your home purchase, you are most likely paying a monthly Private Mortgage Insurance (PMI). The PMI is an insurance policy that protects the lender — not you. If you default on your mortgage, the lender receives payment from the insurer for the loan given to you. That way, the lender doesn’t lose as much money if you don’t pay your mortgage. Another bad thing about PMI is that the premium you paid is not tax-deductible!
The good news is that PMI can be canceled once you meet certain requirements. The one except to this rule is Mortgage Insurance Premium on FHA loans. Since 2013, mortgage insurance for FHA loans lasts for the life of the loan….yikes!
When You Can Stop Paying Private Mortgage Insurance
According to the Homeowners’ Protection Act, which applies to those who purchased homes after July 29, 1999, lenders are required to automatically cancel your PMI after you have paid off your loan to the point that only 78% of the balance remains.
A servicer must automatically terminate PMI for residential mortgage transactions on the earliest date that both
(1) The principal balance of the mortgage is first scheduled to reach 78 percent of the original value of the secured property (based solely on the initial amortization schedule, in the case of a fixed-rate loan, or on the amortization schedules, in the case of an adjustable-rate loan, regardless of the outstanding balance) and
(2) The borrower is current on mortgage payments.
Borrower Cancellation Request
However, you can have your PMI canceled before that, as long as you take the initiative. You can ask your lender to cancel the PMI when your mortgage balance is down to 80% of the home’s value. However, be aware that the individual requirements of the lender might mean you are rejected.
As you work to get rid of your PMI, here are some of the steps to follow:
- Contact Your Lender: Request guidelines for canceling PMI from your lender. Realize that the guidelines come from the insurer, but you will almost never deal with the insurer. Try to get the guidelines for canceling PMI in writing so that you have a plan to follow.
- Home Appraisal: You will need your home’s current market value to have your PMI canceled. Keep in mind that your home’s market value is not the same as the value used by your county to assess your taxes. You will need to pay for an appraisal and use an appraiser approved by your lender.
- Figure Out Your Current LTV: You can figure out your loan-to-value by dividing how much you still owe on your home to its current value. So, if you owe $150,000, and your home’s value is $190,000, your LTV is .789, or 79%. That means that you can at least ask to have your PMI canceled.
What Happens if Your Lender Says No?
According to the law, the lender has to cancel the insurance when you have paid your loan down to 78% of the amount borrowed. So, you can wait for that benchmark to be released. However, you can ask the lender to reconsider. You should ask in writing.
Write a polite letter, and have it delivered certified mail (keep the receipt proving the lender received your correspondence), requesting that the lender take action. Include documentation of the home’s appraisal, as well as point out that you have made your payments on time. You can bolster your case by pointing out that you are a low default risk since you have been making regular, on-time payments for years.
You want to keep copies of the letters, and the proof that your lender received them, for future purposes. In some cases, lenders and their insurers move slowly (rather than saying no) to keep charging you PMI.
If you feel that you are meeting the guidelines for cancellation of PMI, you can take the lender to a small claims court to force action on your request. This is where having copies of the lender’s guidelines, in writing, and the correspondence exchanged with the lender comes in handy.
You don’t have to pay PMI forever. Pay attention to the value of your home, and the rate at which you are paying down your mortgage. You can save money in the long run by exercising your rights.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.