August 2016

By Ken McCord

Private mortgage insurance, or PMI, is expensive. You probably have it if you bought your house with less than 20 percent down. You can remove it after you have met some conditions.

To remove PMI, you must have at least 20 percent equity. You may ask the lender to cancel PMI when you have paid down the mortgage balance to 80 percent of the home’s original appraised value. When the balance drops to 78 percent, the mortgage servicer is required to eliminate PMI.

Although you can cancel private mortgage insurance, you cannot cancel FHA insurance.

Canceling PMI sooner
Here are steps you can take to cancel mortgage insurance sooner, or strengthen your negotiating position:

Refinance: If your home value has increased enough, the new lender won’t require mortgage insurance.

Get a new appraisal: Some lenders will consider a new appraisal, instead of the original sales price or appraised value, when deciding whether you meet the 20 percent equity threshold. An appraisal generally costs $300 to $500.

Prepay on your loan: Even $50 a month can mean a dramatic drop in your loan balance over time.

Remodel: Add a room or a pool to increase your home’s market value. Then ask the lender to recalculate your loan-to-value ratio using the new value figure.

Refinancing to get out of PMI
When mortgage rates are near record lows, as they are now, refinancing can allow you to not only get rid of PMI, but also reduce your monthly interest payments. It’s a double-whammy of savings.

The refinancing tactic works if your home has gained substantial value since the last time you got a mortgage. Let’s say you bought your house three years ago for $500,000, and you borrowed $450,000. That means you have a loan-to-value ratio of 90 percent, and you pay for PMI.

Three years later, your house has appreciated in value, and your loan balance now equals an amount that is 76 percent of today’s current value. (You also paid that $50 a month extra, right?) Because the balance is less than 80 percent, you can refinance into a new loan without having to pay for PMI.

Many loans have a “seasoning requirement” that requires you to wait two years before you can refinance to get rid of PMI. If your loan is less than two years old, you can ask for a PMI-canceling refi, but you’re not guaranteed. 

What mortgage insurance is for
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, too.

Know your rights
By law, your lender must tell you at closing how many years and months it will take you to pay down your loan sufficiently to cancel mortgage insurance.

Mortgage servicers must give borrowers an annual statement that shows who to call for information about canceling mortgage insurance.

Other requirements to cancel PMI

According to the Consumer Financial Protection Bureau, you have to meet certain requirements to remove PMI:

• You must request PMI cancellation in writing.

• You have to be current on your 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).

• You might have to get an appraisal to demonstrate that your loan balance isn’t more than 80 percent of the home’s current value.

Higher-risk properties
Lenders can impose stricter rules for high-risk borrowers. You may fall into this high-risk category if you have missed mortgage payments, so make sure your payments are up-to-date before asking your lender to drop mortgage insurance. Lenders may require a higher equity percentage if the property has been converted to rental use.

Current real estate values in Orange County are good right now. Perfect time to say goodbye to PMI.


Get rid of that pesky PMI