Find out why you have to buy PMI and your rights for canceling it.
Private Mortgage Insurance or PMI is a special kind of insurance that lenders may require you to purchase when you take out a mortgage. It’s certainly not the most exciting type of insurance you’ll ever buy because it doesn’t insure you against anything—it only insures your lender. In this post we’ll cover why you have to buy it and how to get rid of it as soon as you can!
What is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance is just one of the expenses that normally go along with getting a loan to buy a home. No one likes having an extra expense tacked on to their monthly mortgage payment, but it’s a requirement when your loan-to-value ratio (LTV) is 80% or more. In other words, when you borrow more than 80% of the value of a property, you can expect to pay PMI. This rule even applies to borrowers with squeaky clean credit.
For example, if you buy a house for $200,000 and make anything less than a 20%, or $40,000, down payment, your mortgage payment will be increased by a monthly PMI premium. I’ll tell you how much that could be in just a moment. Once you pay the loan down to a certain balance, you have rights for getting rid of the policy so you don’t have to continue making PMI payments forever.
Why Do Lenders Require Private Mortgage Insurance (PMI)?
The reason lenders make you pay for PMI is because they consider any loan with less than a 20% down payment somewhat risky. So they require you to mitigate their risk by covering the cost of PMI on their behalf. PMI wasn’t enough to avert our mortgage crisis because there simply wasn’t enough insurance to go around. However, PMI does give the lender some level of protection against loss when a borrower doesn’t pay up.
How Much Does Private Mortgage Insurance (PMI) Cost?
The cost of PMI varies depending on the type and term of the mortgage you have. It could range from one-half to one percent of the loan amount per year. In the case of a $200,000 house where you put 10% down ($20,000) and financed $180,000, your PMI premium could cost anywhere from $75 to $150 per month.
Is Private Mortgage Insurance (PMI) Tax-Deductible?
Private Mortgage Insurance is now a tax-deductible expense for mortgages issued after 2006. However, there’s an income restriction to qualify for the deduction. Your adjusted gross income can’t exceed $109,000, or $54,500 if you’re married and file a separate tax return. How much PMI you paid during the year is listed on Form 1098, the annual statement you receive from your lender.
The Homeowner’s Protection Act (HPA) of 1998 and PMI
I mentioned that once you pay down a mortgage to a certain balance you can get rid of PMI. The regulations that lenders have to follow regarding PMI cancelations for primary residences are part of the Homeowner’s Protection Act (HPA) of 1998. Before this act, it was easy for consumers to get ripped off when it came to PMI. If you weren’t the type to keep a close eye on your loan-to-value-ratio, you could forget about it and overpay premiums for years. And some people simply didn’t know that they could cancel PMI.
According to the Homeowner’s Protection Act, in most circumstances lenders must automatically cancel PMI when you pay down your mortgage to 78% of the value of your home and are current on payments. Even though this rule applies to private loans that were issued after July 1999 only, lenders have the option to extend the provision to older loans.
You might wonder about what would happen in a case where you’ve made payments on a mortgage for a long time, but still haven’t reached a balance that’s 78% or less of your home’s value. Unfortunately, that’s a common situation now for people who have a home that’s declined in value. But this may make you feel better: The Homeowner’s Protection Act says that PMI must still be canceled when you reach the midpoint of your loan, regardless of your loan-to-value ratio. For example, if you have a 30-year mortgage, your lender must cancel your PMI after 15 years, as long as you’re current on your payments.
How to Cancel Private Mortgage Insurance (PMI)
You have the right to be proactive and request cancelation of PMI once you pay down your mortgage to an 80% loan-to-value ratio. The lender will require you to pay for a property appraisal to find out the current value of the property. However, be aware that your lender can still deny your request for PMI cancelation in certain situations. You’ll probably be denied if you have a lien on the property, made late payments over the past two years, or have a high-risk loan.
You might be surprised to know that beginning in 2000, a mortgage over $252,700 is considered a non-conforming mortgage. That fact alone gives a lender the ability to classify it as “high-risk”. If you have a mortgage over that amount, your lender may require you to continue making PMI payment until the loan is paid down to the mandatory 78% loan-to-value ratio.
How to Know When to Cancel Private Mortgage Insurance (PMI)
If you’re like me, the thought of paying unnecessary PMI premiums makes you want to stick sharp pencils in your eyes! So here are some situations to watch out for where you might qualify for a PMI cancelation without knowing it:
If the value of your home has risen. Even though we’ve had a huge market decline, many homes may still be up in value relative to their original purchase price, which could lower your loan-to-value ratio.
If you remodeled your home. Home improvements increase the market value of your home, which can get you closer to the 80% loan-to-value requirement.
If you paid down your mortgage. If you sent extra monthly payments or made a lump sum payment on your principal balance, having a reduced loan balance may have lowered your loan-to-value ratio.
Here’s a quick and dirty tip: Multiply your current mortgage balance by 1.25. That’s the minimum amount your property must be worth in order for you to have an 80% loan-to-value ratio. If you believe your property could appraise for that amount, put down any sharp objects, and contact your lender to request a PMI cancelation right away!
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