Private Mortgage insurance, also known as PMI, is a type of insurance that protect lenders…
Private Mortgage Insurance (PMI) is an additional cost that borrowers incur when their down payment is less than 20% of the home’s purchase price. However, homeowners have options to remove PMI once certain conditions are met. This article provides an overview of three methods to cancel private mortgage insurance on conventional loans: refinancing, requesting cancellation, and automatic termination.
Refinancing to Remove PMI:
When mortgage rates are low, refinancing offers an opportunity to eliminate PMI while potentially reducing monthly interest payments. If your home has appreciated in value since the original mortgage was obtained, refinancing becomes an attractive option. For example, if you bought a house three years ago for $100,000 and borrowed $90,000, your loan-to-value ratio was 90%, requiring PMI. Suppose your home’s value has increased, and an appraisal now estimates it at $112,000. If your loan balance is $85,000, representing 76% of the home’s value, refinancing allows you to secure a new loan without PMI.
How to Cancel Private Mortgage Insurance:
Under the Homeowners Protection Act, homeowners can request PMI cancellation when their mortgage balance reaches 80% of the original home value. This date should have been provided in writing on a PMI disclosure form during the mortgage process. If you can’t locate the disclosure form, contact your lender for the necessary details. Additionally, you can make an early cancellation request if you’ve made extra principal payments that bring your mortgage balance to 80% or less of the original home value. Certain criteria must be met, including a written request, a good payment history, and the absence of junior liens on the property. Your lender may require evidence, such as an appraisal, to determine the property’s current value.
Automatic PMI Termination:
Even if you don’t request PMI cancellation, your lender is obligated to terminate PMI once your principal balance reaches 78% of the original home value. This termination occurs automatically if you are up to date on your payments. However, if your payments are not current, termination will be delayed until your payments are brought up to date. Importantly, termination is not contingent on the actual home value reaching 78% due to potential declines in property value.
Final PMI Termination:
For some homeowners, PMI must be terminated if they reach the midpoint of the loan’s amortization schedule before the 78% mark. Typically, this midpoint occurs after 15 years for a 30-year loan. Special circumstances, such as loans with interest-only periods, principal forbearance, or balloon payments, may trigger PMI termination at the midpoint. Monthly payments must be up to date for termination to take effect.
Exceptions for FHA and VA Loans:
The rules discussed above apply primarily to conventional loans. If you have an FHA or VA loan, different regulations regarding mortgage insurance cancellation and termination will apply. For guidance on mortgage insurance for these types of loans, it’s advisable to contact your mortgage servicer.
Private Mortgage Insurance can be removed from conventional loans by refinancing, requesting cancellation, or reaching specific thresholds for automatic or final termination. Homeowners should explore these options to eliminate the additional cost of PMI once they meet the necessary criteria. Remember to consult your lender or mortgage servicer for detailed guidance based on your specific loan type and circumstances.