How to get rid of PMI insurance?

Emoticon with thumb down on PMI insurancePMI is an abbreviation for private mortgage insurance. PMI is often interchanged with MIP, which is an abbreviation of mortgage insurance premium. There is a difference. You can get rid of PMI, but you may not be able to eliminate MIP. Here's why.

Mortgage insurance is required for FHA and USDA loans. The cost of the monthly insurance premium has changed over the years. The monthly MIP cost is calculated in this way:

Current loan amount X monthly insurance cost factor = annual cost, divided by 12 months to determine the monthly cost. The FHA "may" go away

Getting rid of the FHA and USDA monthly MIP

On January 31, 2013 the Department of Housing and Urban Development announced a change to the cancellation of the monthly mortgage insurance premium.

Whether you can eliminate the MIP depends on when your loan application was entered into the FHA computer.

Before to June 3, 2013, your monthly MIP will automatically cancel when you have 22% equity. For example, if the value of your home is $100,000 and the loan balance is $78,000 or less, you meet one of the conditions. Condition number two, the FHA mortgage insurance has been paid for at least 5 years. For a 15-year loan originated earlier than June 3, 2013, the 78% loan balance must be met; however there is no 5-year requirement for payment.

After June 3, 2013, you are not able to remove the MIP if your mortgage was a term greater than 15 years (i.e. 30 years) and the down payment was less than 10%. For FHA loans with a down payment of 10% to 22%, the MIP can be canceled after 11 years.

Getting rid of PMI (private mortgage insurance)

Private mortgage insurance is applicable to loans that are NOT government backed mortgages. The FHA, VA and USDA are all insured or guaranteed by the federal government. If your loan is not a government backed loan, and your initial down payment was less than 20%, you probably have PMI. Again, MIP is for the government mortgages, and PMI is for non-government mortgages.

Prior to the passage of the Federal Homeowners Protection Act of 1998, lenders were not required to remove the monthly PMI charge. Homeowners' could have reduced their loan balance by as much as 80% and would still be required to pay the monthly fee. At that time, the only way to eliminate the charge was to refinance the mortgage, but the Federal Homeowners Protection Act of 1998 changed all that. The law says that lenders are required to terminate the PMI cost, free of charge when the outstanding balance of your mortgage drops to 78% of the original value of your home. For example, if the home as purchased for $100,000 and the mortgage balance is $78,000 or less, then the lender must drop the PMI cost. There is a "catch"; the borrower must be current on the mortgage when the loan reaches the 78% balance. Otherwise the lender is not required to remove the private mortgage insurance.

The law also allows homeowners to request PMI removal when the loan balance reaches 80% of the original sales price.

According to the Consumer Financial Protection Bureau:
- Your request must be in writing.
- You must have a good payment history and be current on your payments.
- Your lender may require you to certify that there are no junior liens (such as a second mortgage) on your home.
- Your lender can also require you to provide evidence (for example, an appraisal) that the value of your property hasn’t declined below the original value of the home. If the value of your home has decreased below the original value, you may not be able to cancel PMI at this time. SOURCE: CFPB

How do I know if the loan balance is at 80%?

There are numerous loan amortization calculators on the internet. Simply type in sales price (or original appraised value of the home if the existing mortgage is a refinance mortgage) and enter the current loan balance.

What if the the lender refuses to remove the PMI cost after you provide the lender with an appraisal?

If the lender is uncooperative, file a complaint with the Consumer protection Bureau