The majority of people purchasing a home with less than 20 percent down are required to buy private mortgage insurance (PMI). This insurance covers the lender in the event you default on the loan. While the required insurance makes home ownership possible for so many purchasers, it can add around $50 to $100 to your monthly payments. That’s roughly $18,000 to $36,000 over the life of a 30-year mortgage! You may be stuck with PMI for now, but can you get rid of it?
There are certain milestones during the life of your mortgage when you can request that your PMI be cancelled. Here are three popular milestones:
1. 78 Percent – Federal law requires that banks cancel PMI when you hit certain thresholds. As the law puts it, this happens when “the principal balance of the mortgage is first scheduled to reach 78 percent of the original value of the secured property.” This is referred to as the loan-to-value ratio — the outstanding loan divided by the value of the property.
2. Halfway Point – Even if you haven’t reached the magic “78” number, you can request cancellation at other times. The loan servicer is supposed to cancel the insurance at the halfway point. For example, on a conventional 30-year mortgage, that would be at the 15-year mark.
3. 80 Percent – You have the right to ask for earlier cancellations — at 80 percent. The Consumer Financial Protection Bureau provided the following instructions for doing this:
• Your request must be in writing.
• You must have a good payment history and be current on your payments.
• Your lender may require you to certify that there are no junior liens (such as a second mortgage) on your home.
• Your lender can also require you to provide evidence (for example, an appraisal) that the value of your property hasn’t declined below the value of the home when you first bought it. If the value of your home has decreased, you may not be able to cancel your PMI.
It’s important to note that in order to request cancellation of your PMI under any of the rules, you should have an excellent payment record. If you have questions about cancelling or avoiding PMI, contact us! We have helped countless clients save money when buying a home.