Get Rid of PMI
The steps you need to take to free yourself from private mortgage insurance.
Elizabeth Carlassare
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Get Rid of PMI
Today’s topic is how to get rid of PMI.
In Episode 22, I spoke about private mortgage insurance or PMI, and how it’s tax deductible for homes purchased in 2007. Since that episode, some of you have emailed me asking how you can get rid of PMI.
What is Private Mortgage Insurance (PMI)?
But first a little refresher: PMI is insurance that protects the lender in the event that the borrower defaults on the loan. Lenders typically require the borrower to pay PMI if the loan is more than 80% of the house’s value. The cost of PMI varies, but is typically about 0.5% of the loan amount each year. The upside of PMI is that it allows a borrower to buy a house with less than 20% down, but the downside is that the borrower must pay for the PMI even though it protects solely the lender.
If you are currently paying PMI, the good news is that you don’t have to pay it forever. It’s possible to get rid of it.
When Can You Get Rid of PMI?
For mortgages established on or after July 29, 1999, the Homeowners Protection Act requires lenders to automatically cancel PMI when the loan balance is paid down to 78% of the original purchase price. And, if the borrower requests it, the lender must cancel PMI when the loan balance is paid down to 80% of the original value. For PMI to be canceled, the borrower’s mortgage payments must be current.
These rules for canceling PMI do not apply to FHA or VA loans, high-risk loans, or loans with lender-paid PMI. And again, the Homeowners Protection Act does not require lenders to cancel PMI for loans originated before July 29, 1999. But it doesn’t hurt to ask! If you got your mortgage before this date, ask your lender what you need to do to cancel PMI.
In many cases, it’s possible to cancel PMI much sooner than you could by paying down the loan to 78 or 80% of the home’s original value. Although they’re not required to by law, lenders and mortgage servicers who follow Fannie Mae and Freddie Mac guidelines may cancel PMI based on the home’s current value instead of its original value at the time you got the mortgage. Using the current market value instead is a big win for borrowers since it means you can usually cancel PMI much earlier. The Fannie Mae and Freddie Mac guidelines apply regardless of the date your loan was originated, but you must have had your loan for at least two years and you must not have had any 30-day-late payments within the last year, nor any 60-day-late payments the year before that.
Under the Fannie Mae and Freddie Mac guidelines, you can cancel PMI when your house has appreciated to a point where the value of your mortgage is 75% or less of the home’s current value if you’ve had your loan for two or more years. If you’ve had your loan for five or more years, you can cancel PMI when the mortgage is 80% or less of the home’s current value.
How to Cancel PMI
To cancel PMI early, you need to take action! First, get an idea of the current value of your home. Websites such as Zillow.com can give you a rough estimate of your home’s value. Next, ask your lender what you need to do to cancel PMI and what the value of your home must be to cancel.
If your lender does allow PMI to be cancelled based on your home’s current value, they will order an appraisal at your request and expense. It’s makes sense to pay for the appraisal if it’s very likely to show that your home has appreciated enough to meet the criteria for canceling PMI and you are otherwise eligible to cancel. [[AdMiddle]
If you do have PMI, canceling it as soon as you are eligible to do so can save you money each and every month and is well worth the effort! So if you’re currently paying PMI, contact your lender and find out what you need to do to cancel it.
For more up-to-date information about PMI and how to cancel it, please check out episode 176 of Money Girl.
As always, everyone’s situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice.
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Related links:
o The Homeowners Protection Act of 1998opens PDF file
House in Gift Box image courtesy of Shutterstock