The steps you need to take to free yourself from private mortgage insurance.
Today’s topic is how to get rid of PMI.
In Episode 22, I spoke about private mortgage insurance or PMI, and how it’s tax deductible for homes purchased in 2007. Since that episode, some of you have emailed me asking how you can get rid of PMI.
What is Private Mortgage Insurance (PMI)?
But first a little refresher: PMI is insurance that protects the lender in the event that the borrower defaults on the loan. Lenders typically require the borrower to pay PMI if the loan is more than 80% of the house’s value. The cost of PMI varies, but is typically about 0.5% of the loan amount each year. The upside of PMI is that it allows a borrower to buy a house with less than 20% down, but the downside is that the borrower must pay for the PMI even though it protects solely the lender.
If you are currently paying PMI, the good news is that you don’t have to pay it forever. It’s possible to get rid of it.
When Can You Get Rid of PMI?
For mortgages established on or after July 29, 1999, the Homeowners Protection Act requires lenders to automatically cancel PMI when the loan balance is paid down to 78% of the original purchase price. And, if the borrower requests it, the lender must cancel PMI when the loan balance is paid down to 80% of the original value. For PMI to be canceled, the borrower’s mortgage payments must be current.
These rules for canceling PMI do not apply to FHA or VA loans, high-risk loans, or loans with lender-paid PMI. And again, the Homeowners Protection Act does not require lenders to cancel PMI for loans originated before July 29, 1999. But it doesn’t hurt to ask! If you got your mortgage before this date, ask your lender what you need to do to cancel PMI.