How to Finally Cancel Private Mortgage Insurance (PMI)
By Matt Crisafulli.
This is part 3 of a 3-part series on readying yourself to purchase real estate.
However, in the process of closing the deal, the lender had to add PMI to the loan in order to get it approved and closed. The next question that always comes up is “but how do I get this PMI cancelled?”
What is PMI?
Private Mortgage Insurance (or “PMI” as it is more commonly referred to) is added to your monthly mortgage payment when the down payment made to purchase the property is less than 20%. This insurance protects the lender from losing money if you (the borrower) end up needing to foreclose on the property. It is insurance you pay for, which protects the lender, and the premiums vary based on the loan amount, the down payment amount, and of course, the borrower’s overall credit score.
While many banks now offer low money down, No PMI loans, not everyone will qualify for such a program. Additionally, these types of programs tend to tighten up when the economic cycle shifts from the expansionary phase to the contractionary phase (when the economy begins to shrink) so you should not always count on being able to obtain a low money down loan without also having to pay PMI.
What is the Process to Cancel PMI?
Worst case scenario, lenders are required to cancel PMI when your loan becomes 78% of the original purchase price. Depending on your down payment, this could take quite some time.
However, you can attempt to expedite the process at little and have your lender cancel your PMI once your loan balance reaches 80% of the home’s value. This 80% barrier can be achieved through a combination of the loan being paid down, and the property appreciating in value.
Once the Loan to Value gets closer to that 80% mark, talk to someone at the lender’s customer service department to inquire about procedures for PMI removal. Ask the lender to provide, in writing, the minimum amount the property will have to be valued at to qualify to have the PMI removed. The lender will likely require a written request from you but getting all of your ducks in a row beforehand will save you time and money once your property reaches the magic 80% number.
If attempting to cancel PMI based on the property’s appreciated value, be prepared to pay for an appraisal as well. An appraisal typically costs around $400 so it is wise to make sure your property has actually appreciated as much as you think, prior to initiating this process. The lender will want proof that your home has gone up in value above and beyond what a simple internet search might say.
One final precaution – it is imperative that you never miss a payment or make a late payment while paying PMI. This is a red flag when petitioning to have PMI cancelled and could delay your ability to earn the lender’s approval.
Note: The PMI rules are different for FHA loans. The strategy outlined above is for conventional PMI on a conventional mortgage loan.
Matt Crisafulli, EA, CFP® is a Partner at ACap Asset Management as well as a UCLA Alumnus. He is a Fee-Only CERTIFIED FINANCIAL PLANNER ™ and an Enrolled Agent licensed by the IRS.
ACap Asset Management, Inc. is a “Fee-Only” investment management firm headquartered in Los Angeles, CA specializing in helping doctors and healthcare professionals make sound financial decisions.
Contact ACap at firstname.lastname@example.org or 818-272-8511.