Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is required by many lenders when your home purchase downpayment is less than 20%. PMI is provided by a private mortgage insurance company to protect lenders against loss if a borrower defaults. It allows a buyer to put down as little as 3 to 5% (and even less for qualified borrowers) instead of the 20% usually required by lenders, permitting a buyer to move in sooner and avoid years of saving up for a home. Most lenders generally require PMI for a loan with a loan-to-value (LTV) percentage in excess of 80 percent. An LTV percentage in excess of 80 percent means the buyer has put down less than 20%.
The HOMEOWNERS’ PROTECTION ACT requires that your mortgage company cancel your PMI insurance payment automatically when home equity reaches 22%. As part of the law, lenders must act within 45 days or they must refund the PMI payments to the borrower. According to the law, the automatic cancellation date is set forth as the date when the loan balance is scheduled to be reduced to "78 percent of the original value" of the real estate purchased. Your REALTOR can help you to find that point of your loan.
*** This law does not apply to FHA and VA loans or to high risk mortgages -- the ones exceeding $227,100 for which PMI payments can last as long as 15 years. Insurance payments on FHA and VA loans often last the life of the loan, although monthly payments typically are lower than conventional mortgage payments. The best way to remove the FHA and VA PMI payments is to refinance with a conventional mortgage. A caution here: make sure you are not sacrificing a lower payment just to eliminate the insurance. Remember, loans with as little as 3 % can be considered Conventional.
*** This law covers only mortgages obtained after July 29, 1999. It is unfortunate, but until July 29, 1999, the traditional method mortgage companies collect PMI is still in effect. That does not mean that you cannot personally request termination of the PMI you have on your mortgage after you have 20 percent equity in your home.
If you are in doubt about what part of your monthly mortgage payment constitutes your PMI premium, you can do a quick calculation to arrive at a ballpark figure:
On a $100,000 Fixed Rate, 30 year loan
- Multiply $100,000 (base loan amount) by .78% ($100,000 x .0078 = $780)
- Divide $780 by 12 (months) = $65 your approximate monthly PMI premium.