How Do I Cancel Private Mortgage Insurance (PMI)
What is Private Mortgage Insurance (PMI)?
If you’ve been shopping for a conventional mortgage loan, you’ve probably come across PMI. You’re likely wondering how it applies to you.
It’s easy to assume that this insurance covers you and your mortgage if you fall behind on payments. After all, it’s called insurance and you are paying the monthly premiums.
But this is not the case. PMI exists to protect the lender in case you default on your mortgage loan.
PMI applies to borrowers that are putting less than a 20% down payment on their home purchase. Private insurance companies, working with lenders, provide PMI on conventional mortgage loans. It exists to help lenders manage the risk they are taking when providing you with a home loan.
How is PMI Assessed?
- Loan Amount
On average, about .75% of the loan amount per year. For example, a $150,000 loan amount will give you an annual PMI of $1,125 (about $93.25/month).
- Down Payment %
If you provide less than a 20% down payment, you will most likely have to pay for PMI
- Credit Score
Borrowers with higher credit scores may be eligible for a PMI with a lower percentage. This would result in a lower PMI total and lower monthly payment.
Once the PMI amount is assessed, the annual amount is calculated and divided by 12. This will be added to your monthly mortgage payment. In the example above, you would divide $1,125 by 12 to get a monthly PMI amount of $93.75.
How do I Cancel my PMI?
To have your PMI cancelled automatically, your current loan-to-value (LTV) ratio must be at 78% or lower.
You can make a written request to cancel once you are at 80% LTV. This means that your current principal balance is 80% or less of the purchase price of the home or its current appraised value, whichever is higher.
If you would like to cancel your PMI, following these steps will make it easier:
- Inquire about the cancelling requirements
Call and ask your mortgage company, what the requirements are to request a cancellation at 80%
- Pay extra to principal
By paying extra to principal every month, you will reach the 80% threshold quicker. The typical mortgage varies between 6-12 years to reach the 80% threshold. The variation depends on your interest rate and percentage of down payment.
- Maintain a good payment history
Must be in good standing with the mortgage company
No 30 days late in the past 12 months
No 60 days late in the past 24 months
- There must not be any other liens on the property
- Demonstrate proof of value
You will most likely have to request an appraisal to show what the current value of your home is. You will pay for this appraisal and the cost can vary between $300-$500
Remember that any request for cancellation of PMI must be made in writing and must be sent to the appropriate department at your mortgage company.
Cancelling your PMI early can save you a lot of money in insurance premiums and will decrease your monthly mortgage payment amount. If you have questions and have not taken a HUD Certified First- Time Homebuyer Class, give our office a call at 713-864-9099 or sign up here: https://www.avenuecdc.org/homeownership/buying-a-home/