Rounsavall Title Group, LLC


4360 Brownsboro Road, Suite 102
Louisville, Kentucky 40207

What is private mortgage insurance and how do I remove it?

Posted 2014-11-24 by Hunt Rounsavall

In today's marketplace, when you purchase your new home and your down payment is less than 20% of the property's appraised value or purchase price, your lender might require that you get mortgage insurance, or "MI" for short. This type of insurance policy is issued to protect a lender in circumstances in which a borrower might default on the repayment of the loan due, and, in most cases, you are responsible for making the monthly payments towards the premiums for this policy (there are some situations in which the lender will pay this policy for you, but the interest rate you receive tends to rise accordingly). The reason that a lender requires the issuance of this type of policy is due to the fact that it is taking a far greater risk in making a loan of this nature, as these types of borrowers, regardless of their credit score, tend to have fewer assets than borrowers that can make a more substantial down payment.

The most common type of mortgage insurance is called private mortgage insurance, or "PMI", and this type of policy is frequently issued for conventional loans (the federal government also produces mortgage insurance as well, but this is issued primarily for FHA loans). The amount of PMI that you might pay on a monthly basis is based on a number of factors, including the amount of the money you are borrowing, the amount of the down payment, and your credit score. While this policy obviously helps you buy your home on the front end, once you get it, your goal must immediately be how to remove the PMI from your monthly payment as soon as possible so that your monthly payment will go down as a result.

So how do you remove the PMI from your monthly payment? Well, the federal government standardized this process back in 1999 with the passage of The Homeowners Protection Act, or PMI Cancellation Act. For most mortgage transactions, there are two different stages at which PMI can be removed: when the principal balance of your mortgage reaches 80% of the value of your property, or when it reaches 78% of the value of your property. At the 80% threshold, you may initiate what is called "Borrower-Requested Cancellation," in which you submit a written request to your lender, and the lender must cancel the PMI when all of the following elements occur: (1) you have a good payment history on your loan; (2) you are current on your payments, and (3) evidence that the value of the property has not declined below the original value (which is often achieved through an independent appraisal) and certification that the equity in your property is not subject to another mortgage, such as a home equity line of credit. You can also request PMI be removed from your monthly payments when the cancellation date occurs, which is when the principal balance of the loan reaches (based on actual payments) or is first scheduled to reach 80 percent of the "original value," irrespective of the outstanding balance, based upon the initial amortization schedule. This is something to consider if you have done a substantial amount of improvements to your home since your purchase, or if comparable home sales in the general vicinity are substantially higher than the amount you paid for your home - either circumstance can raise the value of your home, thereby increasing your equity position.

Now, you reach what is known as the "Automatic Termination" threshold, at which point the lender must automatically terminate PMI under the provisions of the Act, on the earliest date that either (1) the principal balance of the mortgage is first scheduled to reach 78% of the original value of your property, based solely on the initial amortization schedule in the case of a fixed-rate loan, or on the amortization schedule then in effect in the case of an adjustable-rate loan, regardless of the outstanding balance, as long as you are current on your payments, or (2) if you are not current, on the 1st day of the 1st month following that date in which you become current.

Again, there are certain loans to which these provisions do not apply, so be sure to ask your lender in advance what type of PMI (or MI) you have prior to signing your loan papers.