Mortgage News – What You Need to Know About Removing PMI From Your Mortgage Loan

The word PMI conjures up a lot of emotion, usually not the good kind. PMI, or Private Mortgage Insurance, is required on conventional loans when the borrower doesn’t have at least a 20% down payment. (FHA loans have it too, but the most common FHA loan, the 30 year fixed, has it regardless of down payment). Since it could add as much as $300/mo to the payment, mortgage clients are very interested in knowing just how to get rid of this insurance as soon as possible.

But most people assume that as soon as they have a 20% equity position in their home, they can simply have it removed from the loan. They assume this because this is what they have been told by many mortgage originators, realtors, and even title agents, all who are generally very well informed. It’s compounded by the fact that the mortgage servicers themselves have not done a good job of notifying their customers when it can be removed.

So what’s the real scoop? It really depends on whether you’re basing the percentages on the increase in the value of your property (vs. the balance), whether it’s based strictly on your pay-down of the principal balance to below the 80% threshold, or if neither of these, the original amortization schedule itself.

Increase in the Value of Property: the Homeowner’s Protection Act of 1998 (HPA) does not require the lender to consider the current property value, so a borrower will have to check with the mortgage servicer to see if they would be willing to do so. Most lenders won’t consider dropping PMI when a new appraisal is used if the borrower hasn’t had the loan for at least 2 years, because Fannie Mae (FNMA) policy requires at least 2 years from the date of closing in order to drop the PMI. After having the loan for 5 years, FNMA allows for dropping it at 80% using a new appraisal. Between 2 and 5 years, they want you to have the loan-to-value ratio below 75%.

Borrower Accelerated Pay-down of Principal (Cancellation): the HPA does cover these circumstances. If the borrower has paid the principal balance down to 80% or below of the lesser of the purchase price of the home or original appraised value, they can contact the servicer and request that the PMI be cancelled. They must submit the request in writing, have had a good payment history, and satisfy any lender requirements such as asserting that they have no 2nd mortgage on the property, and that the property value has not gone down. If the require the latter, it might mean they’ll want a new appraisal, which could cost up to $400 or so. You’ll definitely want to contact them to find out what their exact procedures are for your getting rid of PMI on your mortgage.

Automatic PMI Termination: the HPA also covers this scenario. When the mortgage principal balance, according to its initial amortization schedule, and regardless of the current outstanding balance on that date, reaches 78% of the original value of the home (lesser of the purchase price or original appraisal), the PMI can be cancelled. For example, on a $200,000 sales price and a 10% down payment, it would take about 8 years for the PMI to be terminated by this schedule. Most lenders will follow this schedule, but some won’t, so you have to be diligent. If your PMI remains in your payment after this, you must call the servicer and request to have it removed from your mortgage, per HPA.

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