Removing PMI (Private Mortgage Insurance)

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I understand I have to pay PMI until I have 20% equity in the property. My question is, in order to determine my equity for PMI, is it just the LTV ratio or do I have to pay off 20% of the loan? And if it is the LTV ratio, how do I get that assessed to get out of PMI? Do I just have to get it appraised or would I have to have it refinanced?

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While there is some general truth to the idea that once your loan principal is reduced, your mortgage insurance may be reduced or eliminated, there is no hard and fast rule. Every servicer and every type of loan (fixed, adjustable, conventional, FHA, etc) have different methods and regulations with regards to the termination of mortgage insurance.

FHA (Federal Housing Administration) loans are pretty standardized … your mortgage monthly mortgage insurance lasts a MINIMUM of 5 years, unless you have paid off the loan in its entirety due to sale or refinance … but after 5 years, it is terminated when your loan balance reaches 78% of the original value (the purchase price, or appraised value in the case of a refinance, when you got the loan – not afterwards). If you make regular minimum payments, this takes about 10 years. If you pay down the principal agressively, you may already be at 78% when the 5 year minimum is lifted. The mortgage insurance is supposed to terminate automatically, but it never hurts to call when you know you are getting close.

On conventional loans (Fannie and Freddie), the rules aren’t as defined. Some servicers will allow you to terminate the mortgage insurance if you prove that you have 20% equity in the property, whether by principal reduction or appreciation, or both. This generally entails a new appraisal at your cost, but each servicer (the one to whom you send your payment) has a different procedure. You can call and ask what the procedure is for terminating MI at your particular servicer.

Some servicers will not allow you out of the mortgage insurance until you have reached 80% of the original value, or 80% of the original loan … or until their computerized appraisal of your home and marketplace tell them that it is safe to terminate your insurance and that you and your collateral are no longer an undue risk. Some will deny the termination of MI if your payments have been slow or spotty, so make sure you have a timely payment history. After all, the insurance protects them against loss (or partial loss) in the case of foreclosure … and you certainly appear a higher risk if your payments have not been on time.

If the loan is a private or portfolio loan (written to local bank or jumbo underwriting standards rather than national ones), they may have a different formula than the “20% equity” one – just ask them what it is.

Some mortgage holders report relatively simple transactions with their lender with regards to terminating MI – and others have had to fight tooth and nail, some eventually giving up and just refinancing to a new loan at 80% loan-to (new) value to get out of it.

If termination of mortgage insurance is an important part of your budgetary planning for your home, make sure you ask these questions up front – and if possible, get the answer in writing. A broker or correspondent lender may not be able to give you a perfect answer, as their loans are often done through wholesale outlets where the rates are extremely competitive but the end servicer of your loan is not known until further along in the process …but a retail bank that plans to service your loan should be able to answer you. If you are asking with regards to a loan you already have, just call the customer service number on your statement and ask for a copy of their policy. Push until you get one.

Good luck!

Answered almost 8 years ago
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