When can I remove private mortgage insurance (PMI) from my home loan?
If you were unable to purchase your home with 20% down payment, or refinance with more than 20% equity, it is likely that your mortgage program required you to pay private mortgage insurance (PMI), in addition to your monthly mortgage payment.
Mortgage insurance reimburses the lender if you default on your home loan. You, the borrower, pay the premiums. When sold by a company, it's known as private mortgage insurance, or PMI. The Federal Housing Administration, a government agency, sells mortgage insurance (MI), too.
The standard way to remove PMI
The Homeowners Protection Act gives you the right to request that your lender cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80% or less of the original value of your home. This date should have been given to you in writing on a PMI disclosure form when you received your mortgage.
To remove PMI, therefore, you must have at least 20% equity in the home. You may ask the lender to cancel PMI when you have paid down the mortgage balance to 80% of the home's original appraised value. Some lenders require an appraisal to confirm the value of your home has not decreased before canceling PMI. When the balance is schedule to drop to 78% loan-to-value (LTV), the mortgage servicer is required to eliminate PMI automatically. (The MI on an FHA loan can not be removed.)
How to cancel PMI sooner
If you live in a strong housing market or your home has been renovated since taking out your mortgage, thereby increasing its value, here are four ways to request to cancel the mortgage insurance sooner.
Refinance: This tactic works if your home has gained substantial value since you got your current mortgage. For example, if you bought your house 3 years ago for $200,000, and you borrowed $180,000. That means you have a loan-to-value ratio of 90%, which required you to pay PMI.
Three years later, you've made all your payments on time and have reduce the loan balance to $172,500. And your home's value has gone up -- now it can be appraised at $230,000.
At this point, you owe $172,500 on a $230,000 house. This means you owe 75% of the home's value -- well under the 80% loan to value that triggers the need for mortgage insurance. Under these circumstances, you can refinance into a new loan and it will not have PMI.
Get a new appraisal: If you living in a booming neighborhood, some lenders will consider a new appraisal instead of the original sales price or appraised value when deciding whether you meet the 20% equity threshold. You can contact your current mortgage loan servicer (where you make your monthly payments), to see if this is an option that will work for you.
Pay additional principal: Add an addition $100 to your home payment each month that is applied to your principal can make a dramatic reduction in your loan balance over time, and can help you to increase your loan-to-value.
Remodel: If you made substantial improvements to your home that resulted in an increase to the value and you have an appraisal to substantiate the improved value, then ask the lender to recalculate your loan-to-value ratio using the new value figure. Depending on your loan type, there may be a requirement that you have 75% or less LTV before they will take off mortgage insurance.
Additional requirements to cancel PMI
According to the Consumer Financial Protection Bureau, you have to meet certain requirements to remove PMI:
- You must send a written request to cancel PMI to your lender. By law, mortgage servicers must give borrowers an annual statement that shows who they must call to request canceling their mortgage insurance.
- You must be current on your home loan payments and have a good payment history.
- You might have to prove that you don't have any other liens on the home, for example, a home equity loan or home equity line of credit.
Note: If your loan is guaranteed by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA), these rules generally won’t apply.
If you have more questions on how to best handle your personal mortgage scenario, contact your Starkey Mortgage loan officer.