May 9, 2018

What is PMI And How to Avoid It

Read more about Mortgage

You usually need Private Mortgage Insurance (PMI) when your down payment is less than 20%. Read this article to learn what it is and how to get rid of PMI.

What Is PMI?

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Private Mortgage Insurance (PMI) is required on private loans guaranteed by Fannie Mae and Freddie Mac that do not have at least a 20% down payment, or mortgage refinances with less than 20% equity. Government loans also have their own mortgage insurance.

Mortgage lenders want protection against a default on the loan. Mortgage insurance protects them in the event that you, the buyer, cannot pay your mortgage. When a buyer has less "skin in the game" and does not have the standard down payment for the purchase, there is a higher risk of default and foreclosure.

How Much Is PMI?

Mortgage insurance is part of your mortgage payment. Rates vary depending on your credit score and the amount borrowed, as well as your lender's requirements. Generally, you can expect to pay .03% to 1.5% of the total loan amount for private mortgage insurance. Rates vary, depending on your lender and your credit history.

What About FHA Loans?

FHA loans are an exception to rules about mortgage insurance. An up-front mortgage premium of 1.75% of the loan amount is due at closing. Mortgage insurance is then paid monthly. It cannot be canceled. The only way to get rid of mortgage insurance on an FHA loan is to refinance.

Government loans, such as FHA loans, are not private loans, so they do not have private mortgage insurance, but they instead have their own insurance. VA loans do not require mortgage insurance.

How Long Does PMI Last?

PMI payments remain in effect until the loan reaches a balance of 80% Loan-to-Value (LTV). It does not automatically cancel; you must request the cancellation in writing. You may also be required to have an additional appraisal to verify the value of the home. You may also be required to prove that there are no existing liens.

Once 78% of the loan amount is reached, your lender must automatically cancel PMI, as long as you have a good payment record and no other liens against the home.
It's important to verify with your lender what the PMI contract states, since some private loans will require that PMI is carried for a specific length of time, regardless of the LTV. This requirement is known as "seasoning," and many loans are not eligible for a refi for at least two years.

How Can PMI Be Canceled?

Your lender is obligated by law to tell you at closing how long it will take for you to sufficiently pay down your loan in order to cancel mortgage insurance. Also, the mortgage service company must provide an annual statement to you showing who to contact about canceling mortgage insurance.

The Consumer Financial Protection Bureau requires that all requests to cancel PMI must be in writing. Also, you have to be current on your payments. Having a good payment history is essential as well. A lender will not want to assume the risk of not having PMI if your payment history is troubled. Lenders generally want to see no late payments beyond 30 days during the previous 12 months and no late payments beyond 60 days during the previous 24 months.

It is necessary to be able to show that there are no other liens on the home, such as a home equity loan or a contractor's lien. In addition, you may be required to obtain a new appraisal, showing the current value and demonstrating the loan-to-value ratio. Some mortgage lenders will accept a broker price opinion from a licensed sales agent instead.

If you are a high-risk borrower, your lender may impose strict requirements for the cancelation of PMI. The might require a higher loan-to-value ratio if the property is being rented out.

If home prices are rising in the area, you might want to request a new appraisal to see if you have a loan-to-value ratio that is below 80%. Before you shell out hundreds of dollars for an appraisal to have an early cancellation of PMI, make certain that that you have owned the property for at least 2 years and have an LTV of at least 75%. If you have owned the property for 5 years, you can cancel at 80%.

If you run into problems with your lender over canceling PMI, contact the Consumer Financial Protection Bureau at 855-411-CFPB (2372).

PMI can also be canceled through a refinance. Be sure to look into all the costs of refinancing to make sure that you are actually saving money. You may wind up spending more in fees than you would for PMI until your loan is eligible for mortgage insurance cancellation.

FHA Loans

Mortgage Insurance Protection (MIP) is required for the life of the loan, but it was not always that way. If you closed your FHA loan between July 1991 and December 2000, you will have MIP for the life of the loan. If you applied between January 2001 and June 2013, it is possible to remove MIP once the loan reaches 78% LTV based on the original value, you have not had any 30 day late payments in the past 12 months, and you've been paying MIP for at least 5 years.

If you applied for an FHA loan after June 2013, your MIP will be canceled if you paid more than 10% down after 11 years. If you paid less, you will have MIP for the life of the loan. The only way to stop paying MIP then would be to refinance your loan with a non-FHA loan product.

Bottom Line

Private Mortgage Insurance is a necessary part of life for many homeowners, but by being informed about your loan terms and options, you can avoid paying it for longer than is necessary.

More from CreditDonkey:

How to Get Approved for a Home Loan

Buying Your First Home

How Much to Buy a House

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