If you acquired you mortgage with less than a 20% down payment you likely are paying for Private Mortgage Insurance (PMI). It’s not something to get excited about, but it likely afforded you the ability to get into a home without a large out of pocket down payment. In fact, millions of first time home buyers and the like utilized this tool to achieve homeownership, when it may have been very challenging otherwise.
The drawback to PMI, of course, is that you are required to make payments that don’t have any real significant benefit to you other than getting you into your home with less initial cost. Private mortgage insurance is defined as a product that protects the lender against loss in the case of mortgage default. It does nothing to protect you, the mortgage holder. So, with no lasting advantage why not get out of paying PMI?
You don’t have to be stuck with PMI forever; here is what you need to know about getting rid of private mortgage insurance.
Homeowners Protection Act of 1998 PMI Cancellation:
On July 29, 1998, the Homeowners Protection Act (HOPA) of 1998 was signed into law, later amended December 27, 2000 it was made effective on loans closed on or after July 29, 1999.
For our purposes HOPA provides two primary benefits: Cancellation of PMI at customer request and automatic termination of customer paid mortgage insurance upon reaching a particular equity percentage of the property’s original value.
Once your mortgage balance reaches 78% of the original sales price or appraised value the PMI will be cancelled. Under the provision, this rolls of your mortgage automatically.
Automatic mortgage insurance termination comes with a few caveats:
- You must be current on the loan as defined by the mortgage terms. However, once the borrower becomes current HOPA does require PMI termination
- The loan to value (LTV) calculation is made without consideration of outstanding principle owed. In other words, any prepayment won’t help accelerate your goal of early PMI removal. The Act states that automatic private mortgage insurance removal won’t occur until your loan is first slated to reach 78%, based on the original mortgage amortization schedule
Protections are in place for the consumer. Lenders are prevented from imposing additional restrictions. Contrary to customer requested cancellation, current home value declines or subordinate liens that may be associated with the underlying property cannot restrict the consumer’s right to auto removal. Auto PMI cancellation is also mandatory on property’s that may have dropped below original value.
Automatic cancellation of MI can also occur at the midpoint of a loan. In the case that PMI is not removed automatically or at customers request it will be taken off at the midpoint of the amortization period of the mortgage. LTV requirements must be met and the monthly payments must be current.
Cancellation of PMI at Customer Request
According to HOPA removing mortgage insurance is a customer right that must be honored by mortgage lenders once their outstanding principle loan balance reaches 80% of the property’s original value.
There are some requirements when it comes to cancelling private mortgage insurance, based on the original value or current value methods:
Customer Initiated Cancellation “Original Value” – Cancellation Date
- Cancellation date is defined as one of the two: 1) the date at which the loan balance is scheduled to reach 80% of original value or 2) the date the principle loan balance actually reaches 80% of original value based on payments
- Customer must submit a written cancellation request to their loan servicer
- Customer must have a good mortgage payment history. Fannie Mae and Freddie Mac define “good payment history” as not having payments that were not over 30 days late in last 12 months or 60 days past due in the 12 month period beginning 24 months before the date the customer requests cancellation or the actual date of cancellation
- Customer cannot have an active subordinate lien(s) on the mortgaged property
- The value of the subject property cannot have declined below the original value. Original value is defined by the lower of the purchase price or the initial appraised value. Lenders are not required to consider increases in property value. The only purpose of this requirement is to determine if properties value is still above original value.
- Customer can prepay the loan to get rid of PMI quicker
Customer Initiated Cancellation “Current Value” – Cancellation Date
• Current Value is not a part of HOPA coverage. Current value policies are set by individual investors. We will refer to Fannie Mae and Freddie Mac polices, as they are the most common investors in the industry. Other investors may have their own policies or overlays.
• Customer must submit a written PMI cancellation letter to their loan servicer
• Customer must have a good mortgage payment history. Just like original value Fannie Mae and Freddie Mac define “good payment history” as not having payments that were not over 30 days late in last 12 months or 60 days past due in the 12 month period beginning 24 months before the date the customer requests cancellation or the actual date of cancellation
• Current value can be achieved through appreciation of real estate value, prepayment or both, without restriction.
Current valuation is determined by the individual servicer. Most common would be to cancel PMI with new appraisal, Automated valuation model (AVM), or Brokers price opinion (BPO):
• Fannie Mae and Freddie Mac requirements to cancel PMI for single family, primary or second home:
-LTV must be 80% or below of current value if loan is seasoned more the five years
-LTV must be 75% or below of current value if loan is seasoned between two and five years
• Requirements to cancel PMI for 2-4 Primary or 1-4 Investment properties:
– Fannie Mae LTV must be 70% or below of current value if loan is (typically) seasoned for two or more years
-Freddie Mac LTV must be 65% or below of current value if loan is (typically) seasoned for two or more years
-Seasoning restrictions may not apply if value increase is a result of documented property improvements post origination date.
The details covered above are primarily a reflection of HOPA federal legislation. Though individual investor requirements are commonly associated with the “current value” cancellation model, they cannot legally be more confining when it comes to what is granted by the HOPA Act. In regards to state laws it is possible that there are more protections for the borrower, in which case state law may supersede. It’s always a good idea to check with your mortgage servicer to see what federal or state laws may apply to your ultimate goal of cancelling PMI.
How to get Rid of FHA Mortgage Insurance (MIP)
With FHA mortgage insurance, the FHA collects an annual insurance premium, often called periodic or monthly MIP, it is collected on a monthly basis with your mortgage payment. Much like PMI, mortgage insurance premium (MIP) is insurance that protects the lender in case of Federal Housing Administration (FHA) borrower default. If you have an FHA loan and you are looking to remove MIP the rules aren’t quite as flexible when compared to its conventional loan counterpart, at least as of late.
How long you have to pay the FHA mortgage insurance premium comes down to when your loan was originated. Anything started after June 3rd of 2013 will require you to pay MIP for the life of the loan, assuming you put the customary 3.5% down. And in this case the FHA will not automatically cancel MIP when you reach an LTV of 78%.
If you put 10% down or more you can remove MIP after 11 years. For most FHA loan holders that finance after this date there are very few options. In this case the only solution to stop paying MI is to get out of the loan by paying it off or by refinancing.
If your loan began between December 31st of 2000 and June 3rd of 2013 the FHA MIP cancellation rules are a bit more accommodating. Here’s how to calculate when to cancel PMI:
• The balance of your loan is at or below 78% of original value
• Must have made payments for 5 years if you have a 30 year loan
• 5 year payment requirement does not apply if you have a 15 year loan
• Available only for Mutual Mortgage Insurance (MMI) FHA products, not applicable for FHA 203(k) loans, condo’s and more.
Updated Annual Mortgage Insurance Premium (MIP) displayed below:
Other Ways to get Rid of Private Mortgage Insurance
If you don’t meet the above requirements you will want to consider the alternative (s):
One way to cancel PMI if your home value increases would be to refinance to get rid of PMI. This may be a great solution for some, but not all. Things to consider:
• You will need to have enough equity (80% LTV) in your property. If the refinance appraisal comes in low you may have to come to the closing table with more funds
• The current interest rate environment will be an important consideration
• Refinancing will most likely come with costs
Other options on how to get rid of PMI without 20% equity:
• Lender Paid Mortgage Insurance (LPMI)
• Alternative lending: some lenders may offer no PMI loans with low percentage LTV requirements. Proceed with caution, as these programs often come with some caveats, like higher rates, costs, etc.
• VA mortgage loan if you are an eligible veteran
How to Calculate When to Cancel PMI
Calculating where you need to be to remove mortgage insurance is rather straightforward. You will need to determine that you owe less than 80% of what your property is currently valued at. The simple formula is what you owe divided by your appraisal value.
Example: You owe $195,000 on your home that appraises for $260,000. We divide $195,000 / $260,000 = 75% Loan to Value (LTV)
In this case the 25% equity (75% LTV) is more than adequate to meet the 80% LTV requirement.
The same calculation can be applied to original value when calculating automatic or lender PMI cancellation. We divide what you owe by original value.
Example: Let’s say you still owe the $195,000, but the original value was $250,000. We divide $195,000 / $250,000 = 78% Loan to Value (LTV)
It should go without saying that in the case of appraisal you will want to make sure the value is there before going to the expense of appraisal. There are a number of online home value estimators available these days like Zillow and the like.