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Private Mortgage Insurance

What is Private Mortgage Insurance (PMI)?

Homeownership may come with extra costs. Unlike homeowners insurance, private mortgage insurance, PMI, is a monthly premium intended to protect home mortgage lenders in case you, the homebuyer, default on (stop paying) your conventional mortgage payments.

Unlike U.S. Federal Housing Administration mortgage loans (FHA loans), which require upfront mortgage insurance premiums (MIP) and last for the duration of the loan, PMI payments can be removed over time if the right steps are taken.

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

The cost of PMI is calculated by using factors like your home's purchase price, down payment, credit score, and insurance policy. In order to cancel PMI, your mortgage lender needs to see that you have accumulated significant equity in your home (usually up to 25%) 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, and at some point, the mortgage lender will no longer require the private mortgage insurance and you will be able to remove the cost of PMI from your mortgage payments.

A second way is to increase your home's value, either due to local property increases or a remodel. However, even if this happens, some mortgage lenders will make you wait a period of time to establish that the increase to the original value of the home is long-lasting and not temporary.

Cancellation of Private Mortgage Insurance

Removing your private mortgage insurance costs depends on the terms of the conventional loan and is up to your mortgage lender and the insurer, but there are some basic guidelines that apply to houses that were 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, so ask your lender who it uses to appraise homes, or who they recommend using.
  • Calculate your loan-to-value ratio: Divide your loan by your home's new appraised value to arrive at 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 that your ratio is 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 dropped 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 (takes many months) in canceling your private mortgage insurance, consider taking the lender to small claims court. It will usually not be financially worth it to take them to regular court. If this is the route you are considering, you should speak to an attorney about pursuing legal action against your mortgage lender.

If You Chose a Higher Interest Rate Over Private Mortgage Insurance

If you do not have PMI and instead chose to pay a higher interest rate to avoid having to pay PMI costs, your vendor is extremely unlikely to remove it, regardless of your equity increase. You might consider refinancing your home if this is the case.

Since refinancing transactions are usually complex and time-consuming, you should consider speaking to a real estate lawyer if you are considering the refinance process.

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