I like saving money, don’t you!! So, how can you make that line on your monthly mortgage statement called Private Mortgage Insurance, better known as PMI, go away? PMI is often misunderstood and we quite often hear from borrowers, loan officers and realtors the popular statement of “all PMI stops at 80%”. However, that’s incorrect and there are definite nuances that you should know about so let’s review PMI.
Let’s drop that PMI aka saving money …..
If you took out a conventional (Fannie Mae or Freddie Mac) loan when you purchased your new home and didn’t put down a 20% down payment, then odds are you have PMI on your loan. For some homeowners, refinancing is the ideal way to drop PMI, because they can also lower their interest rate and save a great deal of money. But the good news is refinancing is not the only way to rid yourself of PMI. This monthly cost can be eliminated when certain criteria is met. In fact, Federal law (The Homeowners Protection Act of 1998 or HPA Act) requires loan servicers to terminate PMI when these conditions are met and provides three options for terminating PMI.
Option 1 – Borrower Requested PMI Cancellation: Once the loan balance is paid to under 80% of the original price, the borrower may request (in writing) that PMI be cancelled on the cancellation date. The cancellation date means either the date when the principal balance is first scheduled to reach 80% of the original property value (lower of purchase price or appraised value) or date on which the principal balance reaches 80% of the original value based on actual payments. The borrower may make extra payments to move up the cancellation date. For this option the following conditions must be met:
• You submit a written request for cancellation
• Borrower must be current on the loan.
• No additional subordinate liens
• Must provide evidence satisfactory to the note holder that the current property value has not declined below its original value (usually the original sales price). This basically means you will probably end up paying for a new appraisal. If trying to use current value (presumably higher) than please note most loan servicers have a minimum 2-year seasoning requirement. In addition, if the loan has been seasoned for less than five years than Fannie/Freddie Mac will require the LTV to be below 75% if you are using current value (which is presumably higher than the value at the time of purchase).
Option 2 – Automatic PMI Cancellation: Better news …. Even if you don’t ever ask, your servicer still must automatically terminate PMI on the date when your principal balance is scheduled to reach 78 percent of the original value of your home. For your PMI to be cancelled on that date, you need to be current on your payments on the anticipated termination date. Otherwise, PMI will not be terminated until shortly after your payments are brought up to date. “Good payment history” means no payments 60 or more days past due within 2 years and no payments 30 or more days past due within 1 year of the later of the cancellation date or the date you submit a request for cancellation. To determine the “automatic” cancellation date ask for an amortization schedule and then see when the loan balance will reach 78% of the original purchase price.
Option 3 – Final Termination at the Mid-Point: If all else fails you can still drop PMI on most conforming loans. This “final termination” is at the midpoint of the amortization period. For example, on a 30 Year loan the PMI must terminate after 180 payments (as long as the Borrower is current).
Outside the Box …..
There are a few instances when Option 1 and 2 do not apply. These include when PMI was required and the loan was either a second home or investment purchase or the property type was a 2-4 unit. These types of loans are considered “high risk” and are not subject to the HPA rules. However, as long as the Borrower is current, PMI must still be terminated under Option 3. The other category is for Lender defined High Risk Non-conforming loans (better known as Jumbo loans). This loan type is also not subject to the HPA Borrower requested or Automatic termination features. Nevertheless, PMI for these loans is required to be dropped when the loan is scheduled to reach a 77% LTV based on the lower of the original value or original loan balance (and you are current on your mortgage payments).
Out of luck if …..
It’s important to note that Private Mortgage Insurance (PMI) is for conventional loans, not Government-backed loans such as FHA, VA or USDA. But let’s still give you a run-down on these loan types.
FHA – In addition to the upfront MI you paid (or most likely financed) when you took out the loan, FHA charges a monthly MI fee. The majority of FHA Borrowers fall into one of two scenarios. Scenario A – Sorry, but if you put down less than a 10% down payment than this monthly MI fee will continue for as long as you have the loan. The annual MI fee percentage (currently 0.85%) on FHA Loans remains in place for the entire 30-year term but because it is based on the remaining mortgage balance, the dollar amount decreases slightly each year as your loan balance amortizes down. Scenario B – If you did put 10% or more down as the down payment than the monthly MI will be eliminated after 11 years.
USDA – Similar to FHA, this loan type also has an upfront and monthly MI fee. The annual fee (currently 0.35% X the loan balance) is recalculated each year based on the new balance of the mortgage. The annual fee percentage on USDA loans remains in place for the entire 30-year term but because it is based on the remaining mortgage balance, the dollar amount decreases slightly each year as your loan balance amortizes down.
VA – Thankfully, VA loans do not require monthly PMI so you don’t have to worry whether it falls off or not. However, like all government-insured loans, VA loans do have a funding fee which is an up-front fee that is customarily financed on top of the loan amount.
Written by Michael Scott