Say Good-bye to PMI
For a quick recap — PMI is insurance that protects the lender in case you default on your mortgage payments. They usually require this of homeowners whose down payment is less than 20%. PMI helped you purchase your home in the first case, but you don’t want to be stuck with it forever.
Here’s a rundown on how you can meet your lender’s cancellation requirements now or in the near future:
Stop Right There!
Your lender needs to see that you have accumulated sufficient equity in your home (usually around 20-25%) in order to end the payments. There are two ways to accomplish this:
- Make enough payments on your mortgage so that your equity increases.
- Your home’s value has increased significantly either due to local property value increases or home improvements.
Steps to Take
The requirements for canceling your PMI depend on the terms of the loan and the lender. Some lenders require a minimum time, usually two years, before they approve any cancellation.
However, there are some basic guidelines for homes purchased after July 29, 1999 under the Homeowner’s Protection Act:
• Read over your paperwork when you took out your loan, but also write to your lender asking about its cancellation procedures.
• Get your home appraised since lenders need to know its current market value. Don’t use your tax assessment since that may show an entirely different value. Some lenders will require that you use their appraisers, so double check this before hiring your own and wasting money on two appraisals.
• Calculate your “loan to value” ratio to see if it’s below 80% — divide your loan by the home’s new appraised value. For example, if your loan is $300,000 and the home was appraised at $350,000, than your ratio is 85.7% (still too high!).
• The lender MUST cancel your PMI when you’ve hit a 78% ratio.
• In today’s market with decreased values in certain neighborhoods, it might take a longer time to reach a balance of 78% of the home’s value. Rest assured, the Homeowner’s Protection Act says that PMI must 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 loan, your lender must cancel your PMI after 15 years as long as you’re current on your payments.
Don’t Give Up
Lenders really have no incentive to spend time reviewing your file and canceling your PMI. There’s really no benefit for them so don’t be surprised if it’s a slow process.
To protect yourself with a paper trail, make your requests in writing (save your copies!). If the lender refuses or takes months, write polite but firm letters asking for action. If there’s no response, then consider going to small claims court. Your paper files will serve as evidence in court.
Help Your Case
There are ways to improve your chances of having your lender cancel your PMI or to quicken the process.
• Make extra payments toward your principal balance of your loan if possible. This can be the fastest way to reach 20% equity.
• Pay your mortgage payments on time since lenders will consider this when you reach 20% equity. You want to be a good, reliable customer in their eyes.
• Maintain the value of your home with regular upkeep and maintenance so your assessment is less likely to show a decrease in value.
• Avoid taking out any home equity loans or lines of credit, which reduce the amount of equity you have in your home.