Homeowners who put down less than 20% of the loan on their home almost always pay private mortgage insurance (PMI). Lenders believe that those who are able to put down at least 20% are less likely to default on a loan. PMI protects the lender if you default on your mortgage payments and your house isn’t worth enough to fully repay the lender through a foreclosure sale. PMI premiums add cost to your mortgage payment every month and the amount is based on how much you’ve borrowed. But without PMI, people who can’t make a 20% down payment would be less likely to own a home.
So how long must you pay this extra premium? You can request in writing that your lender cancel your PMI when you’ve paid down your mortgage to 80% of the original value—in other words, when you’ve reached 20% equity. But you must also meet these other qualifications: (1) a clean record of payment and compliance with the terms of your mortgage; (2) your property value hasn’t declined; and (3) you have not encumbered the property with liens. According to the Homeowners’ Protection Act, the lender must grant your request to cancel the PMI if you meet these conditions (the Act applies to all people who bought homes after July 29, 1999). Going further, the Act states that the lender must automatically cancel your PMI when you have paid down your mortgage to 78% of the home value (22% equity). But keep track of that date yourself rather than relying on the lender as it could be years before you reach this point. If you have an FHA or VA loan, these rules generally don’t apply as conditions of these loans are different than conforming loans.
Is there a way to cancel PMI sooner? If you haven’t reached the 80% original home value yet but you suspect that your home has significantly increased in value, you can make a request for cancellation. But expect a long process and the burden of proof to be tricky. Usually such a request will require a surge in home value in your neighborhood or significant remodeling that you’ve completed to improve value. If lenders do agree to cancel PMI on this basis, they may require at least a two year waiting period to do so.
When you start the process of requesting that your PMI be cancelled, first find out from your lender the exact procedures that their private insurance company requires. Request it in writing. Most likely you’ll need to:
(1) Get a professional appraisal to determine your home’s current value. Make sure you use whomever the lender recommends as you don’t want to pay for an appraisal that the lender rejects. Or have the lender order the appraisal. Either way, you’ll be paying for it.
(2) Calculate your loan to value (LTV) ratio and compare it to your lender’s requirement. To calculate LTV, just divide your loan amount by the home’s value (as determined by the appraiser). For example, if your loan is $100,000 and your home is appraised at $125,000, your LTV ratio is .80, or 80%. If your LTV ratio meets the lenders requirement, follow the lender’s procedures for PMI cancellation that you requested. You’ll probably need to write another letter stating your home’s current value, your remaining debt, and a copy of the appraisal report.
As the person paying your mortgage and PMI, you care the most about when you can eliminate the PMI payment, not the lender. So keep a close eye on your equity and know when it’s the appropriate time to request cancellation. Of course, there are other ways to eliminate PMI. If you’re able, you can pay down your loan faster with higher monthly payments or you can consider refinancing or restructuring your loan without PMI. Research and weigh the options for what makes the most financial sense for your situation.