The Truth About Private Mortgage Insurance & How To Cancel It

[adrotate group="2"] 

If you are one of the many people who took advantage of the free-flowing credit offers (you know, during the early 2000′s when people just asked wanted to know “how much I can borrow” without a second thought) to purchase a home with less than the standard 20% down payment, you are undoubtedly aware that you are paying extra money each month in addition to your principal, interest, and in some cases taxes and interest.

What many do not understand, however, is just what those extra payments are for, why they are being charged, or how to get rid of them. And, the interesting thing is that for all those who tried to use a mortgage payments calculator, none of these tools ever mention this additional cost in the calculation, nor do many financial articles that dealt with real estate or mortgages. 

So, for the uninformed, those extra dollars represent private mortgage insurance or PMI.

Suspicious mortgage broker

If you get your mortgage from a shady place, you can expect to find a lot of surprises down the road too. Image credit: © TheTruthAbout

 

[adrotate group="1"]

What is PMI?

PMI is the money that mortgage lenders charge as a hedge against homeowners falling behind on their payments and eventually defaulting on the loans. It isn’t an insurance for the benefit of the borrower, but rather a protection for the lender; a fee that is charged on loans which, when originated, represented more than 80% of the sales price of the home. It used to be that banks would not loan money for the purchase of a home if the prospective buyer could not afford to pay at least 20% of the property’s sales price up front. PMI was established to help potential homeowners reach their goals of homeownership faster by enabling them to put less money down and pay this insurance cost to cover the lender’s increased risk.

 

How to remove PMI

Since PMI is an insurance coverage for paying less than the standard down payment, it is going to be part of your mortgage for some time. There are, however 3 ways to have the insurance eliminated from your payment:

 

  1. Cancellation: This is a manual process by which you put in a request with the mortgagor to have the insurance payments removed. To qualify, the account must reach a loan-to-value (LTV) ratio of 80%, but there is a catch. The catch is, the basis for this calculation is the original purchase price of the home, or the current appraised value of the home, whichever value is less. What this means is that if you want to take the initiative to remove the PMI from your loan account, you need to obtain an appraisal, and if the current value is less than the original purchase price of the home, then the loan balance must be at most 80% of this new value. Should the appraisal come in higher than the original purchase price, then the balance has to be at most 80% of the that original price. In a bad economy, this option is less likely to occur since most homes have been devalued in many areas of the country.

     

  2. Automatic Removal: On July 29, 1999, the new Homeowner’s Protection Act of 1998 was enacted which by law, made this an automatic process that should  require no action on your part. If you stay current on your mortgage, the lender is legally required to automatically remove the PMI from your account when the balance reaches 78% of the original purchase price. The lender has 30 days from the date your account reaches this 78% ratio point. Additionally, if there are any unearned premiums charged by the lender they have 45 days from that date to return those premiums to you.

     

  3. Final Termination: If, for some reason, neither of the first two situations occurred, the lender is required to terminate the insurance the month after the midway point of the loan. Basically, if you are on a 30 year loan which has 360 payments and have not had the insurance cancelled, then by the month following the 180th payment (the midpoint of the loan’s lifetime), the coverage should be removed.

 

A point of caution

There have been many people who say that making extra payments on loans, or having an appraisal improving the value portion of the LTV equation will accelerate the process of removing PMI. Unfortunately, the wording in the Homeowners Protection Act is quite clear, and contradicts those claims [for automatic cancellation]. The document (on page 2) states in plain English that the thresholds for determining LTV is “based solely on the initial amortization schedule, in the case of a fixed-rate loan,or on the amortization schedules, in the case of an adjustable-rate loan, regardless of the outstanding balance”. What this means is that on no date other than the date determined by the original amortization schedule when the loan reaches the desired LTV can the PMI be [automatically] cancelled.

 

How you can avoid PMI

There are 2 was to avoid having to pay for PMI on a mortgage:

  1. Pay 20% of the purchase price of the home up front in the form of a down payment; and
     
  2. Obtain a second loan (commonly referred to as piggy-backing” in order to come up with the required down payments

 

Which method will work best for you will depend on your situation. In some cases, it will be impossible to come up with the 20% down payment, and sometimes obtaining a piggy-backed loan may require significantly higher interest rates, which will make make carrying PMI a more affordable option. The best way to approach the situation is to have all of the pertinent information available and take the time to analyze all of the options to see what best fits your financial plans.

[adrotate group="2"]

  • http://twitter.com/AverageJoeMoney Average Joe

    Great information. Most people don’t know about #2 and #3 when trying to get rid of it. Especially now, I think looking for that 78 percent of original purchase price is key.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      I couldn’t agree more.  The way things are right now there are 2 things that need to be done:

      1. Prepare yourself and have all of the correct information available before making any decisions; and

      2. Don’t make any purchases until you are fully funded in order to avoid having to deal with stuff like PMI

  • Anonymous

    Eric- 

    I’m always learning new things regarding PMI and it’s hard to keep all the “rules” straight. Is there something in the fine print stating you must be below 80% AND have paid on the loan for 5 years? I feel like I read that somewhere but I haven’t seen it mentioned since.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      That’s for the Up Front Mortgage Insurance Premium (UFMIP).  It’s a little different than than PMI, in that it’s a pre-payment that the IRS allowed to be deducted on Schedule A on loans closed after December 31, 2006 (when it was not deductible previously).  For the UFMIP, the insurance must be maintained for 5 years on a 30-year loan.  I’m not too sure on any other details regarding it, though.

  • http://www.familymoneyvalues.com Marie at FamilyMoneyValues

    Nice info.  We put down more than 20% on all of our properties so hadn’t come across this personally.  I had read about it though.  Another thing to watch out for, although not part of the mortgage, is life insurance tacked on – to pay off the mortgage should one of the owners die before you get it paid off.  We fell for that one, but it would have been much cheaper to just go buy a term life insurance policy ourselves!

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      I have never heard of that before.  Actually, I’m not well versed in insurance period, but especially not insurance to cover mortgage payments.  I may have to look into that just to familiarize myself with the practice.  Thanks for the heads up!

  • http://moneytalkscoaching.com/blog-2/ Ashley @ Money Talks

    Getting rid of my PMI was a total pain but so so worth it.  It was several years ago now so the details are fading but the house value had gone up (during the boom) and I wanted it taken off since we owed way less than 80% of the house value.  I called them and they said, “No, you have to owe less than 80% of your original loan”.  Which at that time we owed like 82%.  So we paid extra and called them back.  Then they say, “No, you have to have PMI for two years before it can be removed.”  So I waited til the two year mark and called back.  Then they said well, you have to pay for an appraisal. $300.  Which we did and then finally had it taken off.
     
    I’m SO glad we did it since house values have gone down so much I no longer have 20% equity. If I hadn’t gotten it taken off when I did I wouldn’t have been able to.  It paid off to stay on top of it. 

    • http://pulse.yahoo.com/_CZOHWALP44AO2VC4U264M3FLNE JS

      that was bull shit!

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      That’s the one thing about timing, if it’s good it’s usually very good, but when its bad, it sucks!  Even though it really isn’t such a large amount of money, it’s still money that can be better used in other areas.  It would be nice if there was a plain-English set of rules and there weren’t all of these differences between removal methods, but the all of the lawyers and congresspeople would be out of jobs

  • Balagan_us

    I think your “point of caution” regarding borrower cancellation is incorrect.  Section 4901(2) of the statute states that a borrower can request cancellation at 80% of original value “based solely on actual payments,” not based on the initial amortization schedule, as you state.  This holds true for both fixed and adjustable rate mortgages.  The Federal Reserve guidance you cite says the same thing.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      Yes, you are partially correct–that portion was not supposed to be included since it is not the same for both cancellation categories, and the relation was only supposed to be between the ration and the timing. However they are both certainly based upon original amortization of the loan.  Nice catch, you need a job as proofreader?

  • Ron

    How very timely of a post. I literally just got off the phone with my mortgage lender and then saw this article. My lender never cancelled PMI after I hit the 78% threshold and I had just read up on the HPA law that was passed.  Are you saying they now have to refund me the premiums that should have never gotten charged in the first place?

    • http://pulse.yahoo.com/_CZOHWALP44AO2VC4U264M3FLNE JS

      hope they have to plus interest !

    • Anonymous

      I believe it depends when your mortgage was written.  Mortgages written before July 29, 1999 don’t fall under the new regulations.

      • Ron

        Mine was written in 2003 so it sounds like it would apply.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      I would call the lender and ask them about it.  If not, I would say that a good next step would be to speak to a real estate attorney.  I’m not one, so I couldn’t say for sure one way or another, but if your loan meets all of the criteria then I don’t see why they shouldn’t be made to pay you back for unearned premiums.

    • netdragon

      You have to reach the DATE for automatic cancellation at 78%, based on amortization, not the amount. Otherwise, if you are under 80%, you have to request cancellation BY WRITING and go through appraisal, proof there’s no leins, etc. They should send you a list of what you have to provide them, and you probably have to pay them to use their own appraisers.

  • http://twitter.com/prairieecothrif Miss T

    When we bought our house we didn’t have 20%. We know we should have but it was bad timing. Next time we will do our darndest to avoid these fees.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      Yeah, unnecessary fees can be frustrating, but sometimes it may be a necessity. If the choice would have been to pay PMI or lose the home it may very well make sense to pull the trigger and eat the added costs.

  • Anonymous

    There is a 3rd way to avoid PMI and I used it.  Use a Credit Union.  I used Navy Federal Credit Union when purchasing my home in 2009.  They only required 5% down to avoid PMI.  I jumped on it.  I know all credit unions do not do this but you should ask.  Can save yourself a lot of money on the down payment.  PMI is not worth paying so if you can’t avoid PMI don’t get a house.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      That’s an interesting option. To your knowledge is that the case of all credit unions or just the deal you got at that particular point in time? I can’t see that still being the case, given all that has happened since 2009 and all of the tightening going on in the lending industry. It would certainly make for some interesting research though.

  • http://www.springcoin.com/blog/ Kevin @ DebtEye

    I didn’t know that your amortization is based on the original schedule.  So if I paid off half of my mortgage balance today, my PMI would still be there?

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      It would appear that for each method of removing PMI, the rules are different and use different criteria.

      For the mortgagee-initiated process, the LTV must reach 80% based on the original amortization schedule is used and at the same time the actual payments must make the LTV 80% of the original value while getting the home appraised to prove the property has not devalued.

      To my understanding, paying down the balance would only work for the purpose of recalculating the future interest portion of the loan (adjusting the amortization schedules in the process). It would seem like it’s the same as book-tax accounting rules where certain expenses are acceptable to reduce net income on financial statements, but do not affect taxable income on a business’s tax return.

      I’m not a realtor or real estate attorney, so I could be off-base, but based on the Act’s wording, this is how it would appear.

  • Anonymous

    One clarification, based on recent experience:

    “What this means is that if you want to take the initiative to remove the PMI from your loan account, you need to obtain an appraisal, and if the current value is less than the original purchase price of the home, then the loan balance must be at most 80% of this new value. ”

    It’s worse than that.  If the appraisal comes in less than the original price, then PMI cannot be removed.  There is nothing in the standard language about using the new price to recalculate a new LTV.   So even if you have the cash to get the principal under 80%, they don’t have to cancel, and your next recourse is to wait for automatic cancellation, or refinance.

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      You are entirely correct, there is nothing in the law that REQUIRES lenders from accepting a new appraisal in the determination of removing PMI.  But, it also depends on the individual situation and institution that is holding the note.  Some places are more consumer-friendly and could possibly allow for this to be done, while other may simply say no since it is very much within their rights to deny a request.  That’s why it’s so very important to call and ask before making any kind of moves that may ultimately result in the wasting of time and money.

  • Jeff

    What about lender paid PMI, wher the lender increases the interest rate a bit to incorporate the PMI. How can this be canceled or broken out again?

    • http://www.dollarversity.com Eric J. Nisall – DollarVersity

      If your interest was increased to compensate for the lender paying the insurance, I’m not sure how it would affect the PMI coverage.  There may be a clause in the loan that reduces the interest rate once the 78% LTV level is reached, but you would have to inspect your documents.  Again I’m not a realtor or attorney, so I can’t say with any certainty. You may want to contact one to find out a more definitive answer.

  • GirlRumi

    Also for removing PMI by making addt’l payments- make sure you explicitly state that any extra payments towards your mortgage are to be put towards the principal balance. Once you reach 80% LTV, request a new appraisal. Hopefully, it will come in at or above the original value (otherwise, you are screwed, as many have commented on here). Whether or not your home will decline or raise in value will vary, depending on where you live, the values of the properties in your area, the growth of your area, the economic well-being in your area, the upkeep/improvements you have done to the property, etc. Then you have to also show evidence that there are no liens on your property. If these factors are all in your favor, you can send the new appraisal and lien evidence to the mortgage company servicing your loan for request to remove PMI.