How Private Mortgage Insurance Works
Private Mortgage Insurance (PMI) protects lenders against borrower’s potential default (if you stop making payments on your loan). PMI is usually applied when your down payment is less than 20%. PMI is used with conventional loans and not to be confused with mortgage insurance primum (MIP) which applies to FHA loans. Today we are only discussing PMI as applied to conventional loans. Usually one pays PMI until there is enough equity in the home to have a loan to value (amount of money you borrowed divided by the value of the property you bought) of 80%.
In certain instances you can request cancellation of PMI and in other instances the lender will automatically terminate the PMI.
REQUEST FOR CANCELLATION
In the below two circumstances one can contact their lender and request that the Private Mortgage Insurance be cancelled:
- When the date the principal balance on your loan is first scheduled to reach 80% of the original value of the property based solely on the initial amortization schedule and regardless of whatever the outstanding balance is on your loan as of that date.
- When the date the principal balance of your loan actually reaches 80% of the original value of the property, based solely on your actual loan payments.
If you are in a position where you can request a cancellation of your PMI, you should know that some lender’s process to cancel PMI is easy whereas other lenders adhere to a stricter policy. Generally, you will have to submit a written request to cancel your PMI to the servicer of your loan; have good payment history; and are current on your loan payments. There are some occasions where a simple phone call to the loan servicer requesting the cancellation suffices, but that is usually the exception rather than the norm.
When the date of your principal balance on your loan is first scheduled to reach 78% of the original value of the property, based solely on the initial amortization schedule for your loan, regardless of whatever the outstanding balance is on your loan as of that date. You will need to be current on your loan and not determined to be at high risk of default for automatic termination to occur.
The above sets forth a general picture of Private Mortgage Insurance. Please know that each lender has specific requirements which may vary from the above.
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