If you put down less than 20% of your home loan, you’re probably paying PMI (private mortgage insurance). PMI protects the lender if you default on your mortgage payments. Of course, the PMI premium is an additional monthly cost on top of a mortgage payment and most people would prefer to be free of it!
Conditions for Cancelling PMI
You can request in writing that your lender cancel 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 (for homes bought after July 29, 1999). The Act also states that a lender must cancel your PMI when you have paid down your mortgage to 78% of the home value (22% equity). Keep track of that date rather than relying on the lender—it could be years before you reach this point. These rules generally don’t apply to FHA or VA loans.
Is There a Way to Cancel PMI Sooner?
If you suspect that your home has significantly increased in value, you can make a request for cancellation. Expect a long process and the burden of proof to be tricky. Granting the request will require a surge in home value in your neighborhood or significant remodeling that you’ve completed to improve value. If lenders agree to cancel PMI on this basis, they may require a two-year waiting period to do so.
When you start the process of requesting that your PMI be cancelled, first ask your lender for their private insurance company’s exact procedures. 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 a lender-approved appraiser so you don’t pay for someone the lender rejects.
(2) Calculate your loan to value (LTV) ratio and compare it to your lender’s requirement. To calculate LTV, 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 their procedures for PMI cancellation. You’ll probably need to write another letter stating your home’s current value, your remaining debt, and a copy of the appraisal report.
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 feasible, you can pay down your loan faster with higher monthly payments or you can refinance or restructure your loan without PMI. Research and weigh the options for what makes financial sense for your situation.
Real Estate Term of the Week
Homeowner’s Protection Act: This act became effective on July 29, 1999, with amendments made in 2000. The “PMI Cancellation Act” addresses homeowners’ difficulties in canceling private mortgage insurance (PMI) coverage. It establishes provisions for canceling and terminating PMI, sets disclosure and notification requirements, and requires the return of unearned premiums.