By Michael E. Fiffik, Esquire
Private mortgage insurance (PMI) protects the lender if you stop making payments on your loan. Lenders may require you to purchase PMI if your down payment is less than 20 percent of the sales price or the appraised value of the home. PMI premiums are added to your monthly mortgage payment and can be as high as $100 per $100,000 borrowed. If you’ve taken out a mortgage in the last five years, you can reduce the length of time you pay PMI by taking a few simple steps. This can save you six to twelve months of PMI payments.
For most loans, you pay mortgage insurance premiums until your loan-to-value ratio (LTV) — this is simply the amount of money you borrowed divided by the value of the property you bought — hits 80 percent. For example, let’s say you bought a $100,000 home and put down 10 percent, or $10,000, and got a $90,000 loan to pay the rest. Your LTV in this case would be $90,000 divided by $100,000, or 90 percent. The longer you pay down your mortgage, the lower your LTV will become. On government loans, mortgage insurance is normally required regardless of the LTV. Lenders must give you a written statement explaining that you have PMI and when you’ll be allowed to cancel it. That statement is probably buried in the reams of paper that you didn’t have time to read but signed at your closing. Dig it out and look at it – it can save you money.
Conventional Mortgage insurance rates vary — usually, the lower your down payment and/or the lower your credit score, the higher the premiums — but typically the premiums can range from $30-70 per month for every $100,000 borrowed. So, if you bought a $200,000 home, you might pay about $100 per month for mortgage insurance. On FHA loans, there is an up-front MIP (mortgage insurance premium) and annual premium which is collected monthly. VA loans have an up-front fee (funding fee) and no annual or monthly premiums.
The Homeowners Protection Act of 1998 governs PMI and gives homeowners certain rights to cancel PMI payments. Once you’ve built up a certain amount of equity in the house, typically 20 percent, the mortgage insurance policy usually may be canceled. The lender usually won’t automatically cancel PMI until you’ve reached 22 percent equity based on the original appraised value of the home, but you can request cancellation at 20 percent of the current market value. You can get to 20 percent equity by paying down the principal or if there’s appreciation of your home’s value due to the market or improvements that you have made.
How do you know what your home is worth? Homeowners can contact a local appraiser and ask whether they do “PMI Cancellation Consultations.” Some local appraisers will do a quick check for you for a small fee. BUT, that will only tell you if you’re in the ballpark. The good news is that most of these appraisers will credit that small fee towards the full appraisal you’ll need to cancel PMI. Expect to pay about $300 for a full appraisal. The amount you can save in PMI payments can more than make up for this fee.
In order to request cancellation of your PMI payments, you must have a good payment history on the loan and submit a written request to your lender. A sample written request can look like this:
Attention Customer Service:
Subject: [Your loan number] [Names on loan documents] [Property and/or mailing address]
This is a “qualified written request” under Section 6 of the Real Estate Settlement Procedures Act (RESPA).
I am writing because:
I believe that my loan-to-value ratio has reached 80 percent due to [number of payments, appreciation in value of home, etc.]
Attach copies of any related written materials [such as a recent appraisal].
List a day time telephone number in case a customer service representative wishes to contact you.
I understand that under Section 6 of RESPA you are required to acknowledge my request within 20 business days and must act upon my request within 60 business days.
Sincerely, [Your name]
The request should not be sent with your mortgage payment. Your lender probably has a different address for correspondence not including payments. If you aren’t sure, you can check your lender’s website or call customer service. If you are a LegalShield member, we encourage you to call us for a consultation on your PMI situation. We can review and help you understand whether you are eligible to request cancellation of your PMI and submit the request on your behalf to the lender. You can initiate that request with us by calling (800) 375.3089.