Private mortgage insurance (PMI) is a type of insurance policy that protects lenders from the risk that the buyer will default and drive the mortgage into foreclosure. It also allows buyers who cannot or do not want to make a significant down payment to obtain mortgage financing at affordable rates. If you are buying a home and have less than a 20% deductible, your lender will likely minimize its risk by requiring you to purchase insurance from a PMI company before signing the loan.
PMI benefits the lender (the sole beneficiary of PMI), but it can add a significant portion to your monthly house payment: it typically costs about 0. 5 to 1% of the loan amount annually .. PMI on a $200, 000 loan, for example, could cost up to $2, 000 per year or $166. 67 each month assuming a PMI rate of 1%.
Don't confuse PMI with mortgage life insurance, which goes to you (or your beneficiaries) to pay off your mortgage if you die or become disabled. See how can i avoid paying a private mortgage insurance (PMI) payment? For more information on PMI.
Since premiums are expensive (and a PMI policy benefits the lender – not you), it's important to understand when and how you can get rid of your PMI.
Homeowners protection act
The homeowner protection act of 1998 (the "PMI cancellation act") took effect on 29. July 1999 in effect. The law addressed difficulties homeowners faced when PMI coverage was cancelled. And it established uniform procedures for cancellation and termination of PMI policies. The law applies primarily to residential mortgages originated after the 29. July 1999 (if your loan was issued before this date, you will need to contact your lender for more information).
The law outlines three situations in which borrower-paid PMI can be eliminated: automatic cancellation, borrower-requested cancellation, and final cancellation when the loan reaches its median value.
Under the homeowner protection act, your lender must terminate your PMI on the date your loan balance is scheduled to reach 78% of the original value of your home (in other words, when your equity reaches 22). %), assuming they have paid their mortgage payments. If you do not have your payments current on the date your mortgage is scheduled to reach the 78% threshold, the lender must automatically terminate the PMI on the first day of the first month following the date you become current. Once PMI is canceled, the lender cannot require any more PMI payments more than 30 days after the cancellation date or, if they fall behind on payments, the date after cancellation that they use to make their payments, whichever comes first.
It is important to realize that the 78% threshold is based on the date the loan is scheduled to reach 78%, according to your amortization schedule and not according to your actual payments. That is, if they made additional payments and reached the 78% threshold early, their lender does not have to cancel the PMI until the originally scheduled date, which can result in months or even years of making unnecessary PMI payments. To avoid excessive payments, you can request cancellation of PMI coverage (see next section). Also note that FHA mortgage requirements differ from conventional loans, and depend on when your loan originated and how much money you put down. Check with your lender to find out how and when to drop the mortgage premium (PMI).
Cancellation requested by borrower.
By law, borrowers with a good payment history can request that the PMI be canceled when their equity in the property reaches 20% of the purchase price or appraised value. Have a "good payment history" if they do:
- Within the first 12 months of the last two years before the cancellation date (or the date you request the cancellation, whichever is later); or
- Has not made a payment that was 30 days or more past due within 12 months before the cancellation date (or the date they request cancellation, whichever is later).
By law, lenders must inform you of your right to cancel PMI. It is not surprising that lenders could continue to require monthly PMI payments long after borrowers had built up substantial equity in their homes and the lender was no longer threatened by borrower default before the law went into effect. This is now illegal.
To request a cancellation, you must:
- Send a written cancellation request;
- Have a good payment history;
- Be current on your mortgage payments;
- Meet the lender's requirements for proof that the value of the property has not fallen below the original value (e.G. B. An estimate); and
- Provide certification that their equity in the property is not subject to a subordinate lien (z. B. Of a second mortgage).
After PMI cancellation, the lender cannot require further PMI payments more than 30 days after the date their written request was received or the date they met the verification and certification requirements.
Paying their mortgage is not the only way to build the equity that will allow them to request cancellation. If you make improvements that add enough value to your home, you can also meet the required minimum. If they are doing a major renovation – for example, a significant kitchen renovation – check the numbers to see if they qualify for a written PMI cancellation request now.
If you have not yet reached the 78% threshold, you may be able to continue to exclude PMI payments. By law, your lender must terminate PMI on the first day of the month following the date your loan reaches the midpoint of its amortization schedule.This "midpoint" is half the time between your loan origination date and the date the mortgage is to be charged off. For example, a 30-year loan would reach the median value after 15 years.
Again, they must be current for the final notice to be effective. If not, PMI will terminate when you become current. Your lender cannot require payments for more than 30 days after PMI is terminated.
Another option: refinance
Homeowners may have another option to get rid of PMI: refinancing. If you believe that the value of your home has increased, a new loan may be less than 80% of the value of the home, which means you will not have to pay PMI. While this can help homeowners, it's important to do a series of crunching ahead of time to make sure the refinance makes financial sense. In general, it can be a good move if you can refinance at a favorable, lower interest rate and get rid of PMI at the same time.