What is PMI and how do I get rid of it?
PMI is one of those things in life that is both a curse and a blessing. Without it, cash-poor homebuyers can’t get a loan. With it, your payments are higher, it takes a long time to get rid of (with some loans it never goes away) and it only protects the lender.
PMI is short for “private mortgage insurance.” If you have an FHA-backed loan it’s called MIP for “mortgage insurance premium.” Borrowers who put down less than 20 percent of the loan amount when they take out a conventional loan are required to pay a monthly mortgage insurance premium to cover the lender in the event they mess up and default on the loan.
Mortgage Insurance and the FHA Loan
Borrowers who were granted an FHA-backed loan prior to June 3, 2013 can get rid of this monthly headache when the loan reaches a 78 percent loan-to-value ratio for a 15-year loan. If you have a 30-year loan you’ll need to wait until your LTV reaches 78 percent AND you’ve been paying the premium for a minimum of 60 months, which is government-speak for five years.
Pity the buyer that gets an FHA-backed loan today. They’ve changed their rules so that as of June 2013, a borrower that puts down 10 percent on a home must wait 11 years to have the MIP requirement terminated. If you pay less than 10 percent down – which is the beauty of the FHA loan, after all – you must continue to pay MIP for the life of the loan.
Conventional Loans and PMI
The Homeowner's Protection Act of 1998 states that homeowners who have a conventional loan on their primary residence, purchased after July 29, 1999 can request a cancellation of PMI once they have 20 percent equity in the home.
The same law says that the lender must automatically terminate PMI on the date that the loan is scheduled to reach a 78 percent loan-to-value ratio – not based on payments made – but according to the date the loan should reach this milestone, as listed on the initial amortization schedule.
The law gives borrowers another way to realize relief from PMI by stating that the lender has to release you from the requirement when you are at the midpoint of your loan’s amortization schedule, regardless of your LTV.
While low-down payment home loans are a blessing for cash-strapped but credit-worthy borrowers, they come with a price.
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