How to get rid of your PMI
Private mortgage insurance (PMI) is required for mortgage loans where the buyer contributes less than 20% of the purchase price as downpayment. Lenders require PMI on most conventional mortgages because thereís a correlation between borrower equity and default.
The less money a borrower has invested in a home, the greater the probability of default. So, PMI is a financial guarantee that protects lenders against loss in the event that a borrower defaults. Without it, the 20% down payment that lenders typically require shuts many potential homebuyers out of the housing market.
PMI not only puts people in homes Ė it also allows them to buy the homes where they want to live. Consider that two out of five homebuyers who use PMI may not otherwise be able to buy a home, according to the Mortgage Insurance Companies of America, a mortgage industry trade group.
PMI also allows buyers to get more house. With $15,000 down, the most home you can buy while avoiding PMI is a $75,000 home. If you use the $15,000 to put 10% down with an insured loan, you can buy a $150,000 home. Of course, that assumes youíve got the income to handle the mortgage payment.
Cost of PMI
But there is a cost. PMI certainly helps borrowers get into a home, but itís darn expensive. Borrowers usually pay a half of one percent of the loan amount per year. On a $100,000 loan, thatís about $500 to $600 to ensure the top $20,000 of the loan you didnít put down in cash.
And, lenders can charge PMI until youíve reached 20% in equity. On a $100,000 loan with 10% down ($10,000), PMI might cost you $40 a month. If you can cancel it, you can save $480 a year and many thousands of dollars over the life of the loan. Check your annual escrow account statement or call your lender to find out exactly how much PMI is costing you each year.
With a 30-year fixed-rate loan, it could take up to 15 years to chisel it down until you have 20% equity, unless youíre paying extra on your loan every month. Homeowners can cancel PMI when thereís 20% equity in the home, based on the original property value and provided your mortgage payments are current.
How to get rid of your PMI
The good news is that the Homeowners Protection Act of 1998 (which became effective in 1999) established rules for automatic termination and borrower cancellation of PMI on home mortgages. According to the Federal Trade Commission, these protections apply to certain home mortgages signed on or after July 29, 1999 for the purchase, initial construction, or refinance of a single-family home. (Note: These protections do not apply to government-insured FHA or VA loans or to loans where the lender is paying PMI.)
For home mortgages signed on or after July 29, 1999, your PMI must be terminated automatically when you reach 22% equity in your home based on the original property value, if your mortgage payments are current.
If you signed your mortgage before July 29, 1999, you can ask to have the PMI canceled once you exceed 20% equity in your home. But federal law does not require your lender or mortgage servicer to cancel the insurance, so itís important to stay on top of it. Here are other points covered by the law:
Contact your lender or mortgage servicer to learn whether youíre paying PMI. (You can also look on your mortgage-payment stub to see if itís listed there.) If you are, ask how and when it can be terminated or canceled. For more information, contact the FTC by visiting www.ftc.gov or call toll-free, 877/FTC-HELP (877/382-4357); TTY: 866/653-4261.
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