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What Is Private Mortgage Insurance?

Homeownership may come with extra costs. Unlike homeowners insurance, private mortgage insurance (PMI) protects home mortgage lenders.

Suppose a first-time homebuyer defaults on (stops paying) conventional mortgage payments. As long as some type of mortgage insurance (type of PMI) policy exists, your bank will be protected if it can't recoup its losses in foreclosure. PMI will reimburse your lender for the original loan if there isn't enough home equity to clear the loan balance after your home is sold.

Federal Housing Administration mortgage loan (FHA loan) is one type of loan that requires upfront mortgage insurance premiums (MIP). The same is true of VA loans, which charge you a funding fee to fund PMI. PMI payments can be removed over time if you take the right steps.

You can avoid paying a PMI lump sum or upfront premium as part of your closing costs in different ways. You can pay a monthly PMI premium or improve your LTV ratio to avoid PMI altogether.

An LTV ratio, or loan-to-value ratio, is the relationship between your home's value and how much you're borrowing to buy it. If you have a low down payment, you will have a higher LTV ratio. Most lenders will require the borrower to purchase private mortgage insurance if the down payment amount of the home loan is less than 15% to 20% of the loan amount. You usually need PMI until your LTV ratio falls below 80%.

The PMI fixed rate, usually between 0.1% and 2% of your conventional loan, is added to your monthly mortgage payment. It can really add up over time and impact your financial situation.

The PMI cost is calculated using factors like your home's purchase price, down payment, credit score, and insurance policy. To cancel PMI, your mortgage lender needs to see that you have accumulated significant equity in your home to remove PMI payments from your mortgage payments.

Two Ways To Remove Private Mortgage Insurance

Typically, your equity can reach sufficient levels to remove the PMI premiums from your mortgage payments in two ways. First, and the most obvious, is that you've made enough payments to lower your mortgage balance.

As you pay over time, your equity amount increases. At some point, the mortgage lender will no longer require private mortgage insurance. You will then be able to remove the cost of PMI from your mortgage payments.

A second way is to increase your home's value. This can be through property value increases or a remodel. However, even if this happens, some mortgage lenders will make you wait. They'll want some time to establish that the increase in the home's value is long-lasting and not temporary.

Cancellation of Private Mortgage Insurance

Removing your private mortgage insurance costs depends on loan terms. It is up to your mortgage lender and the insurer. But some basic guidelines apply to houses purchased after July 29, 1999, under the Homeowners Protection Act:

  • Ask your mortgage lender how to cancel. Write your lender a letter requesting information on general procedures for canceling your PMI payments.

  • Get your home appraised. Most lenders will require an official appraisal of the value of your home to verify an increase in the property value. Ask your lender who it uses to appraise homes.

  • Calculate your loan-to-value ratio. Divide your loan by your home's new appraised value to determine your loan-to-value ratio. For example, if your loan was for $300,000 and the home is appraised at $350,000, your ratio would be 85.7%.

  • Compare your loan-to-value ratio. Many lenders require a ratio below 80% to cancel your private mortgage insurance. In the above example, most lenders would deny your request to cancel the private mortgage insurance until your ratio drops below 80%.

If Your Lender Won't Cancel Your Private Mortgage Insurance

Mortgage lenders have little incentive to spend time reviewing your file and canceling your private mortgage insurance. So don't be surprised when they seem excessively slow. After all, these premiums are designed to protect them. Make sure to make your requests in writing and save copies of every letter you send.

If your lender refuses or is excessively slow in canceling your private mortgage insurance, consider speaking to a real estate lawyer about pursuing legal action. They can also advise you about your home purchase, insurance rates, and refinancing opportunities to help you avoid PMI or higher interest rates.

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