When does private mortgage insurance go away?

PMI graphicPrivate mortgage insurance, commonly referred to as PMI, is additional cost homeowners face when purchasing a home with less than a 20% down payment. PMI protects the lender in case of default by the borrower.

Homeowners are responsible for paying the premium until the mortgage balance reaches a certain point and often wonder wheprivate mortgage insurance goes away.

PMI will terminate automatically once the loan-to-value ratio has reached 78%. This means that once your outstanding loan balance has decreased to 78% of the original value of your home, you can contact your lender or loan servicer and ask them to cancel it.

It is important to note that you cannot request cancellation if you default on any payments due to foreclosure or bankruptcy.

What is private mortgage insurance?

Like most homeowners, you're always looking for ways to save money on your mortgage. One way you may be able to do this is by getting rid of private mortgage insurance (PMI).

PMI is insurance that lenders require when a borrower makes a down payment that is less than 20% of the home's value. It protects the lender in case the borrower defaults on the loan.

While PMI can be a good thing if you're a high-risk borrower, it can also be a waste of money if you're a low-risk borrower. That's because you're paying for insurance you may not even need.

The good news is that you don't have to pay for PMI forever. In most cases, you can get rid of it once you've built enough home equity.

PMI only applies to conventional loans, and FHA and USDA loans have their variation of private mortgage insurance.

When does mortgage insurance go away?

The Homeowners Protection Act of 1998 (HPA) governs the cancellation of private mortgage insurance for single-family primary residences that closed on or after July 29, 1999. This law provides for the procedure to require lenders to cancel PMI upon the borrower's request.

Borrower-requested termination under HPA

Homeowners celebrating the pmi cancelationThe borrower must provide a letter requesting PMI removal to cancel the PMI. Upon receiving the cancellation request, the lender is required by law to rescind the private mortgage insurance policy if:

  1. on the date the loan balance reaches 80% of the original loan amount, based on an amortization schedule, or
  2. when the loan balance actually reaches 80% of the original value.

The original property value is the lesser of the property's appraised value or sales price. For a refinance mortgage, the appraised value is used.

In addition to the equity requirements, the following requirements must e met:

  1. No subordinate liens exist (2nd mortgages), and
  2. The borrower has an on time payment history, and
  3. The property value has not declined

Automatic PMI cancellation under HPA

The PMI cost must be canceled if either of the following occur:

  1. When the loan balance reaches 78% of original value, based solely on the initial amortization schedule, and
  2. The borrower is current on the mortgage payments by the terms of the mortgage
  3. Loans designated as "high risk may have different cancellation requirements

Cancelling PMI using current market value

The investor/servicer can establish criteria for terminating mortgage insurance based on a property's current market value.

The HPA law does not specify any requirements using appraised value to establish (loan to value). Freddie Mac and Fannie Mae require:

  1. That the loan is at least 2 years old
  2. That the borrowers have a payment history that is acceptable
  3. That the loan to value based on the current appraisal be 75% or less if it has been less than 5 years since the loan was first closed OR
  4. That the LTV based on a present appraisal be actually 80% or reduced if a lot more than 5 years have elapsed given that the funding initially closed

If you are seeking to remove the PMI by way of increased market value, you need to send a letter to the lender/servicer requesting cancelation and tell the lender your opinion of the market value of your house.

Use our free amortization calculator to estimate the loan to value on your mortgage.

SOURCE:
Consumer Financial Protection Bureau

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