Nearly every home buyer initially hates the “P” word — PMI, or private mortgage insurance. Years and years of conditioning have taught generations upon generations of first-time buyers that PMI is something to be avoided at all costs, and even though I daily go to great lengths to demonstrate this is patently untrue, even those that come to see the light about PMI and find themselves with a form of private mortgage insurance will soon arrive at their next concern: “When can I remove the PMI from my payment?”
In the spirit of efficiency, let’s cover some basics first:
- We’ll be talking about conventional PMI here, not the FHA version. FHA insurance (MIP) does not adhere to these rules.
- All of our guidance here assumes that the borrower is current on payments. If there have been delinquencies, the game could change.
- The Homeowners Protection Act (HoPA) of 1998 dictates that when a loan with PMI reaches a loan-to-value (LTV) of 78%, based on the original value, PMI must be canceled by the servicer. This is known as “auto termination.”
- We’re going to base our guidance here on “agency” guidelines and that means the interpretations of Fannie Mae and Freddie Mac. You must always get specific policy from your servicer (the company to whom you send your payments).
- We’re limiting the scope of our conversation to one unit properties. Multi-unit homes have different guidelines in some cases.
Borrower Requested Cancellation
So now that we know that the law requires your servicer to end PMI automatically when certain circumstances exist, what do you do when you realize that it could take years to get to a 78% LTV? You’ve probably heard that you can request a cancellation and demonstrate to the lender that your home has increased in value due to home appreciation in your area and/or that you’ve done improvements to the home that have increased its value. You basically have two options at this point:
- Original Value. When your loan balance reaches 80%, or is scheduled to reach 80%, of the home’s original value (the price you paid for the home or the appraised value at the time you obtained the loan being refinanced), you can make a written request to have PMI removed.
- Current Value. This implies that an appraisal will be done to determine the current market value of the home. When this has happened, the borrower may request a cancellation of PMI at 80% of the value assuming that the loan has a 5-year seasoning, a cancellation at 75% of the value with a seasoning of between 2 and 5 years, and a cancellation at any time if the borrower can demonstrate that improvement to the home has increased its value to 75% or less.
Be Like Blondie
The moral of the story here is to call me if you have PMI on your current loan and are thinking about removing it to lower your payment. I’ll help you assess if it’s possible and also present alternatives where they may exist. In some cases, a refinance is actually a better option financially, but in all cases, the review will be insightful and make you aware not only of your options today but any future thresholds you may cross that could enable your terms to become more advantageous.
Private eyes are watching you,
Vice President of Mortgage Lending
Cell/Text: 415-367-5959 Fax: 415-366-1590
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