If you put down less than 20% on a house, expect to be required to purchase private mortgage insurance or PMI, which protects the lender in the event you default on your mortgage. PMI premiums on a median priced home ($285,000 in 2019) can run between $50 and $100 per month.
PMI might be unavoidable, but it isn’t eternal. Knowing exactly when you’re entitled to cancel coverage can save you a bundle. If you own a median priced home, you’ll pocket between $600 and $1,200 for each year’s worth of premiums you can avoid. That extra cash can be pocketed or better yet used to pay down your principal and your loan ahead of schedule.
When PMI is cancelled automatically
Though often maligned, PMI plays an important role. Many aspiring homeowners, especially first-time buyers, simply can’t afford to put down 20% on a house. Without the safeguard offered by PMI, lenders would be reluctant to extend mortgages to low-equity purchasers.
For many borrowers, the coverage is short-lived. Estimates are that 90% of homeowners are done paying PMI premiums, which as of 2018 are no longer tax-deductible for some, within five years.
If you purchased a house after 1999 and are still paying PMI, you probably fall under the Homeowners Protection Act (HPA) of 1998. Your lender is required to automatically cancel your private mortgage insurance once you’ve paid down your mortgage to a 78% (0.78) loan-to-value ratio, or LTV. Put another way, once you have 22% equity built up. Many lenders will treat pre-HPA loans in a similar fashion. Call to confirm.
To calculate your LTV, divide the outstanding loan amount by the original price of your home. If you have a $190,000 mortgage on a house you purchased for $200,000, the LTV is 95%. You’d need to get the mortgage balance down to $156,000—78% of the original value—to qualify for automatic cancellation of PMI.
When you need to request cancellation
You do not have to wait for automatic cancellation of your private mortgage insurance. When your LTV hits 80%, you can petition your lender to end its PMI requirement. The process can take several weeks. Your lender isn’t obligated to grant your request, but you’ll bolster your case if you have a good payment history.
Start by calling your lender, not the PMI provider. You’ll probably need to make a formal request in writing and pay out of pocket for an appraisal. The average cost of an appraisal is $360.. Your lender will usually select the appraiser.
An appraisal is conducted primarily for the benefit of the lender to confirm that your property hasn’t declined from its original value, however, a high appraisal can work to your advantage. As your property value increases, whether due to a general uptick in real estate prices or specific home improvements, your Loan to Value (LTV) decreases.
Even if you don’t meet the 78% or 80% milestones, you can get PMI cancelled when you hit the mortgage midpoint. On a 30-year fixed-rate mortgage, that would occur after 15 years of payments. This can come into play for certain high-risk loans that call for a longer PMI period.
A way around PMI premiums
In search of a PMI loophole? Look for so-called piggyback loans, also known as 80/10/10 or 80/15/5 loans. Basically, the home lender finances 80% and immediately gives you a second loan for 10% to 15%. You put down 5% to 10%. No PMI is required.
This alternative has traditionally been available for homebuyers with minimal capital but excellent credit. In tight lending environments, however, this arrangement is harder to come by. And even when piggyback loans are available, the extra interest you usually pay on the second mortgage may actually cost more than PMI premiums. Do the math.