Cancel Your PMI
Before the Homebuyers Protection Act was passed by
Congress in 1998, lenders were not required to notify homeowners when the equity
in their home reached a level where PMI was no longer required, so many
homeowners continued to pay this cost unnecessarily for years. Here is how to
cancel your PMI:
Your home falls under this act if you purchased,
constructed, or refinanced your single-family home after July 29, 1999, and your
loan is not a government-insured FHA or VA loan. If you purchased your home
before July 29, 1999, your lender is not required to cancel your PMI when you
reach 20 or 22% equity, but many lenders will do so if you ask.
If the act applies to you, your lender is required to
automatically terminate your PMI when your equity reaches 22% of the original
property value at the time you took out the loan.
For example, say you purchased a house valued at
$100,000, paid $5,000 down, and financed $95,000. Your PMI would be cancelled
when your equity reached $22,000, i.e., when the principal balance of your loan
reached $78,000 (see calculation below).
Alternatively, rather than waiting for your lender to
cancel the PMI, you can request that it be cancelled when your equity
reaches 20% of the original value of your home (as long as it hasn't decreased
in value). If your mortgage is owned by Fannie Mae, PMI can also be cancelled
when your loan balance goes down to 75 percent of your home's current value, as
established by a new appraisal. The loan has to be at least two years old and
you must have made your mortgage payments on time.
Paying PMI for even one month longer than necessary is
throwing away your money. Know what your principal balance has to be in order to
cancel your PMI, and obtain an amortization schedule of your loan (a schedule
which shows how much of each monthly payment goes to principal and how much to
interest and what the balance is after each payment) so you can see clearly when
you reach that point. Don't wait for your lender to notify you that your PMI can
be cancelled. It will cost you money as you wait for your equity to grow from
20% to 22%.
If you're not sure whether you are paying PMI, call your
lender or the company that services your mortgage. If they inform you that you
are paying PMI, ask for the details on when and how it can be cancelled. Don't
pay a business to handle this for you--it's straightforward enough to do
yourself.
One important note: in order for these protections to
apply to you, your mortgage payments must have been current for at least the
last year, you cannot have any liens on your property, and your loan cannot be
considered "high risk."
