The Homeowner’s Protection Act of 1998 also has one other way to get your private mortgage insurance cancelled even if you haven’t reached a LTV of 80% (or 78%), when you’ve reached the chronological midway point of your mortgage loan then your PMI will be automatically cancelled. So on a 30 year loan, after 180 payments and if you’re current on your payments, then PMI coverage is supposed to be terminated.
If you haven’t reached 80% LTV on your home after half of your mortgage payments, there is something seriously seriously wrong.
There are three ways to get rid of PMI and these are all strategies to get your loan to value ratio down to 80% or less:
1. This case is the easiest, you’re already at 80% and you haven’t told the lender you want it cancelled (you always do). If the amount you owe divided by the amount the home is worth is less than 0.80, call up your mortgage lender and ask that you private mortgage insurance be cancelled. You are no longer legally obligated to pay for private mortgage insurance. In fact, the lender is legally obligated to cancel it. If it is less than 0.78, the lender should’ve already cancelled it.
2. The second case is where your LTV is like 81% or 80.5%, so if you’re $500 away from reaching an 80% LTV, then you might want to consider prepaying so you can cancel PMI. By law, anytime you reach 80% LTV, you can cancel.
3. If your LTV is a lot over 80%, your next option is to get your home value changed. If you made any major renovations or if homes in your neighborhood (or comparables) have been selling for much more, you may want to consider getting your home reappraised. Usually a lender will require that you pay an appraisal fee and use their appraiser but if the value of your home comes back much larger, this could pay off in the long run. For example, if you owe $255,000 or a $300,000 home (LTV 85%) and the homes have been selling for $318,750+ then you might want to consider getting it reappraised. If your home value was increased to $318,750, then your $255,000 loan now has a LTV of 80% and you can cancel private mortgage insurance. You might want to wait until homes are selling for a little more than $318,750 (in that scenario) just in case the appraiser comes in a little low. Even if he/she comes in a little low, you can always prepay to get your loan down to 80% of the home value.
Sadly, if your LTV is very high or homes in your neighborhood haven’t appreciated a tremendous amount, you may be stuck paying private mortgage insurance for quite a while.
Mortgage Guaranty Insurance Corporation (MGIC) announced on June 7th that they’d be offering a Spanish language version of Buyer’s Ed, their online homebuyers educational program. Buyers Ed in English and Buyers Ed in Spanish are entirely free and offer a free five part crash course in learning how to buy a home. Considering the price and the fact that you don’t need to provide any personal information, it’s a great resource. If you happen to be working with a lender that requires “homebuyer education certification,” this self-paced course also has a certificate of achievement than you can send to the lender after you finish the Buyers Ed test. It’s a win win situation.
On Tuesday, the House of Representatives passed HR2486 which increased the Department of Veterans’ Affairs’ home loan guarantee program. The current program guarantees 25% of a qualified veteran’s mortgage loan up to $240,000 (or a guarantee on $60,000). Currently, this means is that up to the first $60,000 of the loan is guaranteed by the government and now the eligible veteran no longer needs private mortgage insurance. HR2486 increases the limit from $240,000 to $333,777, or a guarantee of $83,245, and it indexes it with inflation.
Why can veterans now avoid private mortgage insurance? It means that the veterans can now go apply for and hopefully be awarded a VA guaranteed loan, which can be used as a down payment, and thus avoid private mortgage insurance. With a $83,245 loan as a down payment, you can buy as much as $416,225 worth of house without paying private mortgage insurance. While the bill is likely to be signed and passed into law, the current limit of $60,000 means a veteran could still buy $300,000 with nothing down and still not pay private mortgage insurance.
Whether or not this is a good decision is another discussion altogether (if you can’t make any down payment and need all $60,000 should you be buying $300,000 worth of house?) but this does avoid private mortgage insurance.
If you’ve reached a LTV ratio of under 80% (i.e. paid off more than 20% of your mortgage) then you are now eligible to get private mortgage insurance cancelled without question. In fact, if you’ve paid off more than 22% the cancellation should be automatic but you can never be too certain (banks are sneaky!). Often, if you have reached 20% your mortgage lender will require you to contact them directly to get the private mortgage insurance cancelled. Sometimes, a phone call will be sufficient but more often than not they will require a written request. Below you will find a sample letter to cancel your private mortgage insurance:
Written Request to Cancel Private Mortgage Insurance
Today’s Date
Lender’s Name
Lender’s Address
City, State ZIP code
Dear [Lender]:
This letter is a written request to cancel private mortgage insurance on loan number #[mortgage loan number] for the property located at [your street address, city, state and zip code] as I believe I have satisfied the requirements for cancellation as written in The Homeowners’ Protection Act of 1998. If I am not eligible for private mortgage insurance cancellation, please contact me with regard to which requirements I have failed to meet for cancelling the private mortgage insurance. I may be reached at [your current mailing address and telephone number] and request that you contact me with the status of my request as well as whether you require further documentation to proceed.
Regards,
Your Name
As an astute consumer, one of the things you’ll want to do is check out the various mortgage insurance underwriters and shop for the best price. If you approach your loan officer with this proposition, he or she will likely tell you that you actually can’t shop around for private mortgage insurance. It’s probably going to stun you because shopping around is what makes competition and free markets great, but your loan officer is right. You can’t shop around because the lender usually applies for you but even if you could, it wouldn’t matter. The quote you get from one company will differ very little from a quote from another company because they run solely on numbers. In fact, the competition you would expect to find lowering prices actually raises them because of a well known economic theory.
It’s called perverse competition and it occurs when a company offers a product that can only be sold with another, much bigger, product. In this case, the smaller product is mortgage insurance and the bigger product is the mortgage itself. Now, what happens is all these mortgage companies now compete against each other to win the favor of the mortgage companies - which in turn increases their costs. So, in this situation, competition has increased prices for the end consumer. That ends the elementary economics lesson.
The average 30 year fixed rate mortgage has reached 6.67%, over a full point higher than a year ago when it sat at 5.62%. This was caused by inflation concerns voiced in the Federal Open Market Committee minutes that were released today. As a prospective homebuyer, should be happy rates are higher or lower? While you may curse higher interest rates, you’ll be surprised to know that you’re probably better off from a private mortgage insurance perspective. If you’re a homeowner, this is bad.
Why is this good as a buyer? When mortgage loan interest rates go up, it usually means that the housing market will begin to cool off. That means that prices will stagnate and even potentially fall, which means the money you’ve saved for a future home purchase will represent a greater percentage of the price. If you’re luckily enough to have prices dip low enough such that your loan to value is under 80% - you’ve just escaped PMI.
If you’re a homeowner paying PMI - this is bad. If your home value increases, your loan to value ratio will decrease. At some point, it’ll be worth it for you to get your home reappraised by an agent hired by your mortgage lender and if the LTV is under 80%, then PMI will be cancelled. Now, as mortgage interest rates increase, the market will slow and home prices won’t appreciate as quickly so that method of having your PMI cancelled won’t be as easy.