PMI mortgage insurance is an added cost to home ownership that many people pay needlessly.
Why Do You Have to Pay PMI?
PMI is basically an insurance policy you pay for that insures the bank in case you default on your mortgage. You typically have to buy PMI in order to get a mortgage if you put less than 20% down. Mortgage lenders are taking a big risk when they lend you money. They are putting up hundreds of thousands of dollars and hoping that you pay it back. When you make a 20% down payment, you have more skin in the game. Statistically speaking, the bigger the down payment, the smaller the risk of default. If you only make a 3.5% down payment (required for a FHA loan) or even if your down payment is only 10%, lenders worry that you will default.
And if you default on the loan, that means that the lender is responsible for the costs associated with the lost mortgage and the real estate and its upkeep.
This is where PMI comes in. If you default, the payout can help the mortgage lender offset some of the costs associated with foreclosing on your home and trying to sell the property.
When You Can Stop Paying PMI
While it can be disappointing to make mortgage insurance payments, the good news is that you don’t have to do it forever. When you have built enough equity in your home that you “own” 20% of it, you can cancel your PMI. In most cases, PMI is added to your monthly mortgage payment. Most mortgage lenders automatically drop the cost of PMI from your monthly payment when you have 22% equity in your home.
The Homeowner’s Protection Act (HPA) of 1998 requires lenders to offer automatic termination of PMI to their borrowers. However, it is still a good idea to keep track of the situation.
If your lender doesn’t drop the payment, you can point out that it is time to stop charging you for the mortgage insurance. Prior to the HPA, some homeowners would pay PMI premiums for years after they no longer had to.
Automatic termination doesn’t kick in until your loan value reaches 78% of the current value of your home, as long as you are current on your mortgage. This means that if you are behind in mortgage payments, the lender doesn’t have to end the PMI until after you catch up. You can request cancellation of your PMI, when the loan value is 80% of the home’s current value. If your home has gone up in value, this can mean that you pay less in PMI, since your ability to cancel (or have automatic termination) depends on the appraised value of your home, as well as the original purchase price.
You will have to pay for the appraisal yourself. Talk to your mortgage loan servicer (not the PMI insurer) about the PMI removal policy and then follow the procedure. As long as the properly accredited appraiser can verify the value of your home and you follow the steps to have the PMI removed, there shouldn’t be a problem if you have at least 20% equity in your home.
There are rules about late payments with your mortgage that can allow the lender to reject your request for PMI.
PMI is a reality that many homebuyers have to face when they are ready to purchase a home. However, with a bigger down payment and a plan to pay down your mortgage quickly, you can reduce the amount of time spent paying PMI.