Resource Center Morty's Whiteboard, Private Mortgage Insurance (PMI)

What is Private Mortgage Insurance and How Can I Get Rid of It?

Private Mortgage Insurance

Private Mortgage Insurance, or PMI, is a type of insurance that protects mortgage lenders against borrower default risk. In other words, if you stop paying your mortgage, your PMI insurance company will cover a certain amount of the loan balance.

Private mortgage insurance has nothing to do with life insurance, and we shake our heads in disbelief when “experts” suggest so.

For conventional mortgages (mortgages that are not insured or guaranteed by government agencies), private mortgage insurance is typically required when the borrower’s Loan-to-Value (LTV) is greater than 80%.

By the way, LTV is the principal balance of the loan divided by the value of the property. If you put a $30,000 down payment on a home worth $300,000, your initial LTV would be 90%.

This is why many borrowers prefer to save enough money to put 20% down on a purchase, therefore avoiding the extra monthly cost of private mortgage insurance.

So how do you get rid of paying this additional monthly mortgage cost?

Automatic Termination of Private Mortgage Insurance

By law, your lender must automatically cancel your private mortgage insurance on the date your LTV is scheduled to reach 78% of your original home value, unless you’re not current on your monthly mortgage payments.

Let’s look at an example:

Purchase Price: $250,000
Downpayment: $12,500 (5% of Purchase Price)
Initial LTV: 95%
Interest Rate: 4.25%
Loan Term: 30 years (360 months)

Amortization Schedule to 78% LTV

Month

Interest Pmt.

Principal Pmt.

Principal Balance

LTV

1

$841.15

$327.21

$237,172.79

95%

2

$839.99

$328.37

$236,844.42

95%

3

$838.82

$329.53

$236,514.89

95%

4

$837.66

$330.70

$236,184.18

94%

105

$695.74

$472.62

$195,971.18

78%

As you can see, the private mortgage insurance on this loan is not due to be canceled until month 105 (a little less than 9 years after the loan was originated).

Request for Private Mortgage Insurance Cancellation

Is there a way to get rid of private mortgage insurance earlier than 78%? Yes, there is.

You have the right to request that your private mortgage insurance be canceled earlier, on the date your mortgage is scheduled to reach 80% LTV.

Let’s take another look at the amortization schedule from above:

Amortization Schedule to 80% LTV

Month

Interest Pmt.

Principal Pmt.

Principal Balance

LTV

1

$841.15

$327.21

$237,172.79

95%

2

$839.99

$328.37

$236,844.42

95%

3

$838.82

$329.53

$236,514.89

95%

4

$837.66

$330.70

$236,184.18

94%

94

$713.77

$454.59

$201,079.22

80%

105

$695.74

$472.62

$195,971.18

78%

As you can see, this loan is scheduled to reach an 80% LTV on month 94. That means you can save nearly one year of monthly private mortgage insurance payments by asking your lender to cancel it.

There may be, however, a small cost associated with making this request, along with some additional work of proving you are at 80% LTV.

You can also make this request even earlier if you’ve made additional payments to reduce the principal balance of your loan.

Mortgage Insurance Premium (MIP)

PMI is to conventional loan programs what MIP is to FHA loan programs, except that MIP is always required for FHA loan programs, regardless of your LTV.

Another major difference between MIP and PMI: MIP never goes away for most FHA loans.  New FHA rules say that if a loan’s initial LTV is over 90%, MIP will be in effect for the life of the loan.

If the initial LTV is 90% or less, MIP must be paid for 11 years before it can be cancelled.

This is a major drawback of FHA loan programs and a very good reason to stay away from them if you can qualify for a conventional loan program.

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Understanding Private Mortgage Insurance can potentially save you a lot of money in your monthly mortgage payments. At MorgageHippo, we run the numbers so that you can easily compare multiple loan scenarios and know what you can expect to pay in monthly mortgage payments. Take our mortgage calculator for a spin!

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