Private mortgage insurance or “PMI” insures the lender against potential default on mortgage loans. PMI is required with most conventional (non-government backed) mortgages when the down payment is less than 20% of the property value. For FHA loans, it is called mortgage insurance premium or “MIP”. Over 10 million loans have PMI or MIP in the U.S.
The cost of PMI you pay is calculated when you get your loan and it’s then it’s held constant until the mortgage is paid down and the loan to value ratio reaches 78%. Then the lender is required by law to eliminate PMI. The rules are more difficult with MIP. When you start your loan, the cost of PMI is based on amount of the loan, the loan to value ratio or LTV at the start of the loan, a fixed or variable interest rate structure on the loan, and your credit score. PMI is paid most often each month as part of the mortgage.
Lenders work with large private mortgage insurers, like MGIC, Genworth and several others, to obtain PMI coverage.
The Homeowner’s Protection Act of 1998 requires automatic cancellation of mortgage insurance in certain cases for non-high-risk residential mortgage transactions when the loan-to-value on the home reaches 78%. For FHA -insured loans, the cancellation requirements (for MIP) are often more difficult. Contact the lender for specific requirements for waiving PMI.
WHAT YOU MIGHT NOT KNOW . . .
It could take a number of years to pay down your mortgage to reach a 78% loan to value ratio. Your lender doesn’t consider market appreciation or home improvements you make in the LTV calculation unless you tell them!
GET RID OF PMI
The personalized PMI Zombie Quick Check provides valuable information about when you might be able to request cancellation of PMI. You’ll get:
- Your estimated loan to value ratio (LTV)
- Your estimated appreciation for homes in your ZIP code
- Recommended next steps to help cancel PMI