Save yourself thousands of dollars!

What is PMI and how do I get rid of it?

Conventional loans generally require the borrower to put down at least 20% of a home's purchase price. With that much cash invested, few homebuyers will walk away from a loan, even if times get tough or home prices drop. Additionally, it protects the lender as it only needs to sell the house for 80% of its value in order to recover the loan in the event of default. But requiring a 20% down payment can push home ownership beyond the reach of many families, especially in this era of rapidly rising home prices.

PMI or Private Mortgage Insurance solves this problem for many home buyers. It allows you to get a mortgage with a smaller down payment. PMI allows homeowners to make as little as a 3% to 5% down payment and still qualify for a mortgage. In short, Private Mortgage Insurance is a policy that the buyer pays for -- but it protects the lender's interest. That is, if the buyer defaults on his mortgage, this policy guarantees that the lender will receive the principal amount of the loan. In effect, PMI provides the protection that the usual 20% down payment supplies.

Typically, PMI is calculated based on the amount you borrow for your house, and is rolled into your loan and added to your monthly payments. On a $350,000 mortgage with 10% down, PMI may cost you $140 a month. If you cancel the PMI you save $1,680 a year and tens of thousands of dollars over the life of the loan!

Private mortgage insurance should no longer be required once you've made enough payments to bring your home equity up to the 20% level, or you can demonstrate by appraisal that the home has increased in value sufficiently to bring your equity above 20%.

On July 28, 1998, President Clinton signed into law the "Homeowners Protection Act of 1998" which took effect July 29, 1999. Before the Homeowners Protection Act was passed by Congress, lenders were not required to notify homeowners when the equity in their home reached a level where PMI was no longer required, so many homeowners continued to pay this cost unnecessarily for years.

The Homeowners Protection Act now requires that the lender automatically cancel PMI when you have reached 22% equity in your home. Additionally, upon request you can make them drop the PMI premium when equity reaches 20% of the original property value. This law only applies to mortgages originated or refinanced after July 29, 1999. Buyers that purchased before July 1999 can also have their PMI removed, but they must initiate the process (they will not be notified and it will certainly not be automatically terminated) and though the lender is under no federal obligation to do so, most will.  However, uninformed homeowners are paying thousands of dollars in unnecessary premiums.

Alternatively, there is another way that the home owner's equity can reach beyond the 80/20 percent ratio. Many areas of the United States have seen significant gains in the value of real estate over the past decade. In fact, certain areas have seen appreciation levels of 100 percent or more. People living in these areas may find that the value of their property has quickly grown to the point where the amount of principal they owe on their loan is less than 80 percent of the home's current value.  

The hardest thing for most home owners to determine is just when does their home equity rise above this magic 20 percent point? This can be determined by a licensed real estate appraiser. It is an appraiser's job to know the market dynamics of their area. They know when property values have risen - or declined. Faced with this data, the mortgage company will most often eliminate the PMI with little trouble. You can easily order an appraisal online right here.

There are a number of exceptions to this rule which vary significantly between each lender.

One is if your loan is considered high risk i.e. most investment properties. Another is if you haven’t been current on your mortgage payments. (A good payment record means you don't have any payments 60 days past due in the preceding two years, or 30 days past due in the year preceding your request for cancellation). A third is if you have other liens on the property. Some lenders require that you pay PMI for one or two years before you may apply to remove it. Government insured loans, i.e. FHA or VA loans require mortgage insurance for the life of the loan.

So your first step is to contact your lender or mortgage servicer (the number is on the payment stub). Inquire whether you are paying PMI and how much you are paying. Have them mail you information regarding their requirements and procedures for the removal of PMI. The documents you receive will usually give you step by step instructions. Ask your lender to provide, preferably in writing, the minimum amount the property will have to be valued at to qualify for PMI removal. An appraisal  will be a most critical element in the PMI removal process. Inquire whether they have any requirements regarding the appraiser or appraisal that you should be aware of.

American homeowners overpay millions of dollars a year in unnecessary private mortgage insurance. The savvy homeowner, with an eye on our unusually aggressive real estate market, can eliminate it entirely.