Getting Rid of PMI
Private mortgage insurance—PMI—adds $50-$80 per month to the monthly mortgage payment on a $160,000 home. In my book, that’s a lot, and makes PMI one of my pet peeves. Since the beneficiary of private mortgage insurance is the mortgage lender, not the borrower (who’s paying the premium), PMI is yet another fee mortgage lenders extract, in this case from hapless borrowers dead set on owning a house before they’ve exercised the patience and a sound plan to save up a 20% down payment.
What is PMI?
Back in the “good old days,” when banks were so unsophisticated that it hadn’t dawned on their executives to incorporate taxpayer bailouts into their business models, mortgage lenders required a down payment of at least 20% of a home’s purchase price. Then they got smart in bank boardrooms. Bank executives realized they could drop the 20% requirement, boost business by lending to more people and making bigger loans, and charge a hefty fee camouflaged as insurance for their generosity. Brilliant! (Notwithstanding the occasional mortgage meltdown national calamity, but that’s a topic for someone else’s blog…)
You may not have noticed amidst the tsunami of paper during your mortgage closing that you’re paying PMI. But if you made a down payment of less than 20%, you’re almost certainly paying the premium for this insurance that would pay benefits to your lender. The good news is, you’re not stuck with it forever. Here’s how PMI can end:
- When what you owe on your mortgage becomes less than 80% of the home’s 1) purchase price, or 2) current market value (whichever is less), you can and should ask your lender to cancel PMI. You’ll have to pay for an appraisal, but you’ll recover that cost in just a few months if your PMI premium ends. Note that your lender is not obligated to agree to your request to cancel PMI.
- The Homeowner’s Protection Act of 1998 requires that mortgage lenders remove the PMI premium when your mortgage balance drops to 78% of the purchase price. Your banker may be too busy calculating his or her taxpayer-subsidized bonus to keep track of such trivial matters, so it’s up to you and you alone to be sure your mortgage lender follows the law.
- Regardless of anything, the lender must terminate PMI when half of all scheduled mortgage payments have been made, or after 15 years in the case of a 30-year mortgage, for example. Again, your vigilance to insure law-abidance is recommended.
Because you likely don’t think like a politician or a banker, you might reasonably conclude under option (2) above—automatic, obligatory PMI cancellation—that you could speed the day when PMI must be cancelled by making extra mortgage payments. By paying faster, the amount you owe on your mortgage will become less than 78% of the purchase price sooner, right? Yes, that is right, but that’s not going to guarantee that your PMI is cancelled sooner.
According to the law, the lender isn’t obliged to drop the PMI premium until your mortgage balance becomes less than 78% of the purchase price according to the original payment schedule. If the original payment schedule shows your balance at last dropping below 78% of the purchase price 60 months after purchase, then that’s the soonest the lender must drop PMI, even if you’ve made extra payments against principal. A rip-off? Yes! Perhaps we should just be thankful that paying extra at least does cut interest charges!