The concept of Private mortgage insurance can be a confusing one; Leaving first time home buyers, or even seasoned property investors who have taken a different route on their new property lost and needing advice. The thing is it doesn’t have to be; with laws in place to protect the buyer and a number of ways to exit from your Private Mortgage Insurance Policy, investing in property with low down payments doesn’t have to be as intimidating as it seems.
Understanding Private Mortgage Insurance
Private Mortgage Insurance (PMI), not to be confused with mortgage life insurance (MLI), is a type of insurance policy created to reduce the risk for money lenders if a buyer defaults on their payments and the mortgage goes into foreclosure. If a buyer cannot or chooses not to pay more than a 20% down payment towards their mortgage a lender will probably minimize their risk by requiring the buyer to purchase insurance from a PMI company.
PMI policies can add large amounts to your monthly payments, as their rates often go up to 0.5 or 1% annually. With a loan of 150,000, that could mean $1,500 a year or $125 per month added to your payment.
Luckily there are a number of ways that a buyer can exit from their PMI policy.
As long as a buyer has kept up with their loan repayments, and is not subject to a subordinate lien (eg. A second mortgage) it will not take long for them to be eligible for removal of their PMI policy.
The four options are as follow:
2. Automatic Termination
3. Borrower-requested cancelation
4. Final Termination
Although not one of the documented ways to exit from a PMI policy by The Homeowners Protection Act (1998), in which three ways of canceling PMI coverage are outlined, refinancing is an option. Imagine, your property has increased in value enough that a new loan may account for less than 80% of the property value; therefore leaving your PMI unnecessary. If you run the numbers and find that refinancing may be favorable for you, it may be time to consider it.
According to The Homeowners Protection Act, on the date that your equity reaches 22%, or your loan balance is scheduled to reach 78% of the original value of the home a lender must terminate your PMI; As long as you as the buyer are up to date with your payments. If the buyer us not current, they lender is required to terminate the PMI on the first day of the month following the borrower becoming current.
If a borrower were to make extra payments towards their loan and are ahead of schedule, because law states that termination is on the date scheduled to reach 78% according to the original amortization schedule, a lender will not have to terminate PMI until the original date. If this is the case, go to the next section, Borrower – Requested Cancelation
Borrower – Requested Cancelation
When you have reached 80% or the principal balance of your mortgage the homeowners act gives you the right to request that the lender cancel your PMI.
This is reliant on a number of this:
1. The borrower must give a written request of cancelation
2. The borrower must be up to date with their payments and not have missed a payment within 60 days of its due date in the past 12 months
Along with these the lender may request:
1. Proof that the property is not due to a subordinate lien
2. For the borrower to produce evidence that the value of the property has not decreased.
When all of these requirements are met, the PMI is able to be cancelled.
Automatic PMI Termination
Automatic PMI termination is a little bit different in the way that if your property value has declined and have been unable to cancel your PMI policy, this option will still end it.
If you have not asked your lender to cancel your PMI or have been unable to do so, the lender must still cancel the policy when your principal balance is scheduled to reach 78% of the original value of the home. The only requirements being that the borrower has been current on their payments to the point of the anticipated cancelation date. Otherwise the PMI will be cancelled upon payments being caught up.
Final PMI Termination
One last option to be aware of is if the midpoint of the amortization schedule is reached before the 78% date your lender must terminate the PMI.
For example, in a 30 year loan, if the payment schedule has not reach the date projected to reach 78% by the 15 year mark, the lender must still cancel the policy.
Loans guaranteed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), may not be bound by the same rules.