What is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance or PMI is the supplemental insurance that many lenders ask homebuyers to purchase when the amount being loaned is more than 80% of the value of the home. Very often, this additional payment is folded into the monthly mortgage payment and is quickly forgotten. This is unfortunate because PMI becomes unnecessary when the remaining balance of the loan - whether through market appreciation or principal paydown - dips below this 80% level. In fact, the United States Congress passed a law in 1998 (the Homeowners Protection Act of 1998) that requires lenders to remove the PMI payments when the loan-to-value ratio conditions have been met.
When can you get your PMI cancelled?
Start trying to get your PMI cancelled as soon as you suspect that your equity in your home or its value has gone up significantly. The most obvious way for equity to increase is because you’ve made a lot of mortgage payments. Your equity may also increase because your home’s value has gone up due to a rise in local home values or because you’ve remodeled. Such value-based rises in equity are harder to prove to your lender, and some lenders require you to wait a minimum time (around two years) before they will approve cancellation of PMI on this basis.
How do you get your PMI cancelled?
The exact rules for canceling PMI are largely in the hands of your lender -- or, to be more accurate, in the hands of the company from whom your lender buys mortgage insurance (though you’ll never deal with the insurance company directly).
Some baseline rules about cancellation were established by the federal “Homeowners' Protection Act.” This law, however, doesn’t offer consumers as much protection as its name would suggest, and it applies only to people who bought their homes after July 29, 1999. Here are the usual procedures for getting a lender to drop your PMI policy.
Contact your lender to find out the appropriate PMI cancellation procedures. It's best to write a letter to your mortgage lender, formally requesting guidelines.
Get your home appraised by a professional to find out its current market value. Your lender may require an appraisal even if you’re asking for a cancellation based on your many payments, since the lender needs reassurance that the home hasn’t declined in value. If your lender doesn't supply the appraiser, it’s best to use an appraiser whom your lender recommends and whose findings the lender will therefore respect. (Note: Your tax assessment may show an entirely different value from the appraiser’s -- don’t be concerned, tax assessments often lag behind, thank goodness. Your lender will be more interested in an appraiser’s judgment.)
Calculate your “loan to value" (LTV) ratio using the results of the appraisal. This is a simple calculation -- just divide your loan amount by your home’s value, to get a figure that should be in decimal points. If, for example, your loan is $200,000 and your home is appraised at $250,000, your LTV ratio is .8, or 80%.
Compare your “loan to value" (LTV) ratio to that required by the lender. Most lenders require that your LTV ratio be 80% or lower before they will cancel your PMI. Note: Some lenders express the percentage in reverse, requiring at least 20% equity in the property, for example. When your LTV ratio reaches 78% based on the original value of your home, the Homeowners' Protection Act may require your lender to cancel your PMI without your asking. If the loan to value ratio is at the percentage required by your lender, follow the lender’s stated procedures for requesting a PMI cancellation.
For more information on PMI and the Homeowners Protection Act, these following links may be helpful: