By Richard Montgomery
Reader Question: We want to pay down our mortgage loan to eliminate Private Mortgage Insurance. We have the funds to get under the 80% threshold. We have heard some lenders are very uncooperative. Is the lender required to remove it under these circumstances? Chris and Kate D.
Monty’s Answer: There is confusion in the public domain regarding private mortgage insurance (PMI), which may account for the term “uncooperative.” Some background information here will be helpful in answering your question.
The Homeowners Protection Act (http://1.usa.gov/22KNKmd) gives you the right to request that your lender cancel PMI when you have reached the date the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home. You can also make this request earlier if you have made additional payments to reduce the principal balance of your mortgage to 80 percent of the original value of your home.
There are additional requirements to be met. The request must be written, you must have a good payment history and be current on your payments, you may be asked to certify there is no junior loan against the property and your loan servicer can require that you furnish evidence that the property has not declined in value since you bought it. These rules apply for mortgages closed on or after July 29, 1999.
The Homeowners Protection Act does not apply to FHA loans. FHA loans are from private lenders that are regulated and insured by the Federal Housing Administration (FHA), a government agency. The FHA doesn’t lend the money directly–private lenders do. On the other hand, Freddie Mac or Fannie Mae purchase the bulk of conventional mortgages on the secondary market that retail lenders originate. Freddie and Fannie are publicly traded companies and under the control of the Department of Housing and Urban Development (HUD). The FHA rules on PMI are different than Freddie and Fannie rules, which is why the Homeowners Protection Act does not apply to FHA loans. VA loans are low down payment but have no PMI premiums.
Four options for eliminating PMI
- Continue paying the PMI until you have reached the date when the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home. This could take years depending upon the when you purchased the home and the term of your loan. There is no cost to you, the lender must comply (see above) and you do not need an appraisal.
- Work with your loan servicer to obtain a new appraisal performed by a lender approved appraiser to replace the scheduled amount in your amortization schedule. You may not need as much capital if the appraisal is high enough. Assuming the servicer will cooperate the risk here is that the new appraisal falls short of the value required to eliminate PMI. You could be out $250-400 dollars. This option works best in an area of rising home prices.
- Pay the loan down to the principal balance amount your mortgage states you need to eliminate PMI. You should have received a document from the PMI provider or the lender at closing that states the amount required. If you cannot locate this information contact your loan servicer. You will not need an appraisal and your loan servicer is obligated to eliminate PMI. This is the option of least risk and effort.
- Look at refinancing your existing mortgage, which would require a new application and a new appraisal. There are risks here as the appraisal still needs to be high enough and you have to be approved for the loan again. The advantage to this option is you may be able to reduce your interest rate and not require as much capital for the 80% loan to value (LTV) ratio required to bypass PMI. If you have a FHA loan currently, refinancing may be the only way to eliminate PMI. Refinancing makes the most sense when interest rates are low and prices are rising.
Another refinancing consideration
Depending on the age of your loan remember to factor in the remaining years on your existing mortgage when comparing the monthly interest and principal payment on a new mortgage. For example if you have twenty-four years remaining on your existing loan, request a loan of the same duration. If you have rate lock for the life of the loan, you will get an apples-to-apples comparison.
“Richard Montgomery gives no nonsense real estate advice to readers most pressing questions. He is a real estate industry veteran who has championed industry reform for over a quarter century. Send him questions at DearMonty.com.”