Staying on top of your home’s Private Mortgage Insurance (PMI) can help you avoid paying thousands in unnecessary fees over the life of your mortgage.
What is Private Mortgage Insurance (PMI)?
PMI is basically an insurance policy that you (the borrower) take out for the lender to protect them from financial losses in the event that you default on your mortgage.
Generally speaking, lenders require PMI when the borrower’s down payment is less than 20% of the home’s selling price.
Why is PMI Required for Down Payments Less than 20%?
When the loan against a home is greater than 80% of the home’s resale value, the lender is very likely to lose money in the event the borrower defaults on the mortgage.
The fees incurred by the lender for foreclosing on the property, and reselling it can easily reach 20% of the home’s value making such loans a risky proposition for the lending institution.
PMI allows prospective homeowners the ability to purchase homes sooner rather than waiting years to build up a “traditional” 20% down payment.
How to Remove PMI from Your Mortgage
Under the Homeowner’s Protection Act (HPA) of 1998, you can request PMI be removed from your mortgage when the balance on your loan reaches 80% or less of the home’s original purchase price or appraised value at the time of purchase (whichever is less).
In order for PMI to be removed from your loan, you must send a written request to your lender who will determine if your home’s LTV (loan balance to value) warrants the removal of PMI.
Some lenders will remove PMI if your home’s value has appreciated, even if you haven’t paid down any principle. If you are still paying PMI and believe your home’s value has increased over the last few years, contact your lender and ask about their PMI policy. It may be worth paying for a new home appraisal if it means you can have PMI removed from your mortgage a few years or even months sooner.
In most cases, the Homeowner’s Protection Act of 1998 requires lenders to automatically cancel PMI when the mortgage is paid down to 78% of the home’s original purchase price but be vigilant…
It is in your best interest to monitor the equity in your home as it relates to Private Mortgage Insurance and send a letter to your lender requesting that PMI be removed when you reach that magical 80% mark.
If you wait for the bank to automatically drop PMI from your mortgage payment, you may end up paying unnecessary insurance payments for 6 months or more costing you thousands of dollars in extra premiums.
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