Financial Advice Q&A

Occasional Visitor
Kerra
Posts: 4
Question
How do I get rid of my PMI?
[ Edited ]

How much equity in my home do I need to cancel PMI?

Other Answers: 1
Community Manager
JosephMontanaro
Posts: 63

Since you've been writing the checks, you probably know this, but Private Mortgage Insurance or PMI is insurance that protects your lender in the event you default on your loan.  If that happens and the value of the property is less than what is owed, PMI protects the lender from being shorted. Typically, PMI is required on loans where the down payment is less than 20% and is an added monthly expense made as part of your mortgage payment. Of course, you don't pay PMI with a VA loan, but that's a different story.

 

You'll have to check with your lender to determine their exact policies and procedures for getting rid of PMI and they may vary depending on the type of loan you have, but here are some of the basic rules:

 

It's the law. The Homeowners' Protection Act allows you to request that your PMI be cancelled when you've paid down your mortgage to 80% of the original value. This is applicable for folks who bought after July 29,1999. There are a host of conditions (no second mortgage, good payment record, etc.). Once you hit 78% of the original value based on the original loan amortization table (so prepayments do not impact the timing of this measure), the lender is required to automatically cancel your PMI. Just for grins I ran an amortization table on a 30-year mortgage at 5% and the 78% mark is reached in the 11th year.

 

Home value matters. The law I just mentioned covers cancelling PMI in the context of the current loan balance as it relates to the original value. However, you may also be able to cancel the PMI as the result of your home appreciating. Here instead of looking at the ratio of the loan balance to the original value, you'd be looking at the loan balance to the current value of the home. Again you'd be shooting for a loan to value ratio of 80% or less (loan balance divided by home value) and your lender will probably require a professional appraisal to cancel your PMI based on this calculation. The lender may also have a minimal time requirement before you can make this request--typically two to five years.

 

Refinance. If you decide to take advantage of today's low interest rates and refinance that also be your ticket to getting rid of PMI...assuming your loan to value ratio was 80% or less. Obviously, there are a number of considerations beyond PMI that come into play with a refinancing (costs, time horizon, etc.). 

 

New rules for FHA loans. Effective June 3, 2013 FHA borrowers will be required to pay PMI for the life of their loans. This won't apply to you, but for new FHA borrowers PMI may be a long term reality. 

 

I hope you're able to turn those PMI payments into something more productive. Good luck.

 

JJ

Ask USAA Q&A

You must be logged in and have a Community Profile to submit a question.