Many homeowners don't realize they have private mortgage insurance (PMI). But if you put less than 20 percent down, you are paying it each and every month in order to protect your lender against the possibility that you might default on your loan.
Even if you're aware of your PMI, and couldn't have purchased your house without it, you probably hate the fact that hundreds of dollars are added to your monthly payment for the lender's benefit, not yours. Especially when you are among the 95 percent or so of borrowers who have never missed a payment and never will.
Nearly 750,000 homebuyers obtained loans requiring PMI in 2015 alone, mostly first-time buyers earning less than $75,000 a year. Under the law, PMI must be dropped when your loan balance reaches 78 percent of your home's original value. But did you know that there are other circumstances in which PMI can be canceled, but only at your request?
Enter the PMI Terminator, a detailed analysis describing eight possible scenarios under which you can jettison PMI coverage early -- without refinancing and without waiting for the loan balance to reach that all-important 78 percent level.
"For PMI removal, the question is not if, but when," says David Ginsburg of Loantech, the Gaithersburg, Maryland, mortgage audit company that created the Terminator. "There are a lot of different scenarios, but they are somewhat complicated."
The PMI Terminator is an eight-page personalized report based on each homeowner's particular situation. The report costs $99, but "the savings can be significant," Ginsburg says. PMI monthly payments can range from $50 per month to more than $400, so canceling just two years early can result in some real money.
Note: PMI should not be confused with a mortgage insurance premium (MIP). PMI is placed on conventional mortgages, whereas MIP is paid on loans backed by the Federal Housing Administration.
The PMI Terminator is based on loan and property information supplied by the owner. To complete a report, LoanTech needs to know the property's original value, the original loan amount, interest rate, loan term and the date of your first payment. Once those variables are in hand, the program crunches the numbers and spits out the options.
Here are some of the possibilities for dumping PMI:
-- If your loan is owned or held by Fannie Mae, the giant mortgage company that purchases loans on the secondary market from primary lenders, you can ask the lender to delete PMI when your loan balance drops to 80 percent of the property's original value, rather than 78 percent.
Because Fannie's rule is based on a home's original, not current, value, you won't need a new appraisal. And if you prepaid any of the principal before it was due, those amounts are considered as part of the loan balance. Consequently, if you were to make a sizable prepayment to reach the 80 percent threshold, you can petition earlier for cancellation.
Give the Terminator the information it needs, and it will tell you to the month and day when you can solicit your lender under this and all other scenarios.
-- The rule is the same at loans owned or held by Freddie Mac, Fannie Mae's chief competitor and the other government-sponsored secondary market institution. But with Freddie, loan prepayments are not counted against the principal.
-- Your lender must cancel PMI by the midpoint of the loan -- that is, 15 years for a 30-year mortgage -- regardless of whether the 78 percent threshold has been reached.
-- If you make substantial improvements that have increased the value of a house that serves as collateral for a Fannie Mae loan, you can request cancellation when the loan-to-value ratio (LTV) drops to 75 percent or below of present value. Here, though, you'll need an appraisal.
-- With a Freddie Mac loan, if you made such improvements, you can call for cancellation when the LTV is 80 or below. Again, a new appraisal is required.
-- You can't ask for cancellation until the loan is at least 24 months old. But between 24 and 72 months, you can ask to cancel if the LTV doesn't exceed 75 percent of current value. Ditto for loans older than 72 months in which the LTV doesn't exceed 80 percent of current value.