Know your Private Mortgage Insurance (PMI) rights.
Many acronyms are used during the home-buying process: APR, ARM, T&I, P&I, HUD, PMI…the list continues.
PMI stands for Private Mortgage Insurance and is required insurance for home-buyers who put less than 20% of the purchase price down for the initial payment on their home. PMI is required by the lender because the home buyer doesn’t have 20% equity in the home and actuarial numbers increase the opportunity for default on the loan.
For many first-time home-buyers, PMI is unavoidable because student loan debts, stagnant wage growth, and high home prices all present obstacles to providing the full 20% down payment. If PMI is required, are you stuck paying it forever? No. Under the Homeowners Protection Act, home-buyers have certain rights regarding PMI.
Discontinue payments early.
The home-buyer has the right to request early cancellation once equity in the home is 20%, even if before the previously schedule date. This date may come early if extra principal payments are made. Typically, the mortgage balance has to hit 80% of the original value of the home. Depending on the lender, this might be the contract sales price or the appraised value of the home (whichever is lower).
Ask your lender what specific requirements are requested as some might allow a new appraisal on the home which could expedite cancellation of PMI payments if home prices have increased. Discontinue payments on-schedule. The home-buyer has the right to request cancellation once equity in the home is 20%. The law requires the lender to provide this date at closing. To determine if you’ve reached 20% equity, request the home value your specific lender uses (original sale price, original appraisal, new appraisal.)
Assuming the lender uses the original sale price, divide the current mortgage balance by the original sale price; the result should be 80%. If the current mortgage is $150,000 and the original sales price is $187,500. Divide $150,000 by $187,500. The result is 80% which means equity is 20% and you can request cancellation of PMI.
Discontinue payments automatically or finally.
The law requires your lender to cancel PMI one of two ways: automatically or finally. Once your mortgage balance reaches 78% of the lender-used home value (original sale price, original appraisal, new appraisal), the lender must automatically cancel your PMI payments even if you do not request cancellation.
The lender must also cancel your PMI payments the month after you reach the midpoint of the mortgage’s amortization schedule. If you have a 30-year mortgage, the midpoint would be 15 years.
You must be current on payments for all of the above.