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PMI: What it is and how to get rid of it

Private Mortgage Insurance, or PMI, is an insurance you must buy if you take out a mortgage with less than 20% down.  I hate it!  The borrower has to pay it even though they receive no benefits.  Something about being required to purchase a product for the benefit of someone else really rubs me the wrong way.  But that’s neither here nor there.  PMI is here to stay.

What is PMI?

Private Mortgage Insurance is insurance that will pay the lender any lost principal if the borrower defaults on the loan.  You have to pay it if you don’t have a full 20% down payment, which makes you a higher risk to the lender.  Not having 20% equity in the house increases the chances that the lender will lose money if you default.  If you have over 20% equity they can probably recoup their principal even you default.

The cost of your PMI will depend on how big your loan is.  The bigger the loan the more your PMI, makes sense.

How to Get Rid of PMI

There is only one way to get rid of PMI; pay down the loan to the point that it equals 80% of the original purchase price or appraised value at the time the loan was obtained, whichever is less.  Once you have 20% equity, based on the purchase price not today’s prices, you can call and request the PMI to be removed.  They are legally obligated to automatically remove the PMI when you have 22% equity.  Finally, if it’s still going strong, the PMI must be terminated by the midpoint of the loan.

But why wait?!  All those extra dollars should be in your pocket not theirs.  If you can get it off early you might as well!

You must be current on your loan to be considered for the removal of the PMI and not had any 30 day late payments in the last 12 months or any 60 day late payments in the past 24 months.

The law also has this little doozy.

Your lender may require evidence that the value of the property has not declined below its original value and that the property does not have a second mortgage, such as a home equity loan.

However, it doesn’t say what will happen if the value of the house has dropped and a quick Google search didn’t help.  Perhaps someone out there knows the answer to this?  Doesn’t seem fair to punish the homeowner who has done everything correctly but at the same time I can see the banks refusing to drop the PMI so I’m curious.

My PMI Story

We put down 15% on our mortgage.  We bought in 2004 and the house value had gone up between “buying” it and closing on the mortgage. Technically, we were borrowing less than 80% of the home’s value but that doesn’t matter.  As it says above, it’s about the purchase price or assessed value, whatever is LESS.   I was pretty upset that we couldn’t come up with that last 5% to avoid the PMI and I was determined to get rid of it as quickly as possible.

I kept a close eye on the balance as we made our payments and we paid extra in an effort to drop the PMI as quickly as possible.  Once I knew the loan balance under 80% of the purchase price I called to have it removed. The first time I called I was a bit to early, we had like 19.75% equity. Grrr.  So I waited a month and called back.  This time I was told that I had to pay the PMI for two years before they will remove it.  Oh man was I mad at that point!

But I waited and on the two year mark I called them again.  Now they tell me that I have to pay $300 for an appraisal.  Our PMI wasn’t very much per month and when I get to 22% equity they have to drop the PMI automatically so I had to weigh my options.  Is it better to pay $300 for an appraisal or just try to get the loan balance down under 78% of the purchase price quickly.

I decided that it would be cheaper in the long run to pay for the appraisal.

Eventually, after many headaches and calls and letters I was finally able to get the PMI removed.  Much to my delight.

Do you have a PMI story?

3 comments… add one

  • Bryan at Pinch that Penny! March 21, 2012, 4:04 pm

    I hate it too. It seems like if the lenders want this insurance, they should have to pay for it themselves! Now that would have been a good provision to the Dodd-Frank Act.

  • brent April 15, 2012, 2:46 pm

    I`m in the same situation. I dont want to pay for an appraisal because the house has dropped in value. Do you have to get an appraisal if you are at 78% equity because of extra payments?

  • Ashley @ Money Talks April 15, 2012, 4:32 pm

    That’s a good question Brent. I know that I did. I’d call your lender and see what they require.

    Morally they shouldn’t need one because you have done what needed to be done, regardless of the what the value of the house is now. But like I said, I had to get one. All you can do is ask and see what they say!

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