How to Cancel Your Private Mortgage Insurance
Private mortgage insurance, or PMI, has helped many people who did not have a 20% down payment become homeowners. PMI is insurance that you may be required to buy when you buy your home that reimburses the lender if you default. What you may not know is that you may not have to buy the insurance, which can cost from 0.19% to .9%, or $250 to $1,200 per a year, for the life of your loan. In 1998, the Homeowner’s Protection Act changed. It requires your lender to make you aware of your options and their responsibility to cancel your PMI after you pay your loan down if you obtained your mortgage after July 29, 1999.
Why Do You Need Private Mortgage Insurance?
Your PMI protects your lender if you don’t have a full 20% down payment for your home. Because your loan is greater than 80% of the value of your home, the PMI covers your lender’s loss if you default and the sale of your home doesn’t cover the balance on your loan. Once you’ve paid your loan principal down to 80% of your home’s original value, the Homeowner’s Protection Act (HPA) gives you the right to remove PMI.
Your Lender’s Responsibilities
Under HPA, your lender must notify you of your rights three times: once when your loan closes, annually, and then when you cancel or the term of your PMI ends. When your loan closes, your lender has to let you know about your right to request cancellation of your PMI once you reach 80% of your home's original value, and the date you can make the request. They also have to tell you that they must automatically terminate your PMI when you pay your loan down to 78% of your home’s original value and they must make you aware of any exemptions and give you a written term schedule if you have a fixed interest rate.
Annually, they must let you know that you have the right to cancel your PMI and provide an address where you can send your request. Once you have cancelled or the term of your PMI has ended, they have to let you know that your PMI has been terminated, that no more PMI payments are due, and that they are no longer covered by PMI. That means that if they foreclose on your home and are not able to recover their losses they could take you to court. Usually, they may be able to cover their losses if you’ve already paid off the 20% - 22% of your loan needed to cancel your PMI if your home grew in value.
How to Cancel PMI
If you’ve misplaced the letter from your lender, you can call to ask for the address where you should send your request. Typically, you will write a business letter directly to your lender, but occasionally you will have to contact the company that provides your PMI. Your lender may deny your request if you’ve paid down your loan to 80% but you’ve been more than 30 days late on your mortgage payment within the last year.
You can request a cancellation if your home’s value grows before you’ve paid off 80% of your loan, but your lender doesn’t have to comply. They only have to honor the original purchase price on the home when calculating the percentages. If they refuse to remove it and interest rates have fallen, consider refinancing to get rid of the PMI. If you want to avoid PMI altogether, consider delaying a home purchase until you’ve accumulated a full 20% down payment.