If you purchase a property with a down payment smaller than 20 percent, you have to pay for private mortgage insurance, often referred to as PMI. When a bank lends out such a large amount of money, the insurance provides extra protection in case of default. When you reach a certain point in your mortgage, you can get rid of PMI premiums.
The Homeowner's Protection Act requires that your mortgage lender terminate your PMI when your mortgage balance reaches 78 percent of your original home value. For example, if you borrowed $90,000 to buy a $100,000 home, your lender has to automatically cancel your PMI when you're scheduled to reach a mortgage balance of $78,000. The lender has to do this even if your home value has dropped below $100,000. This rule only applies for a primary residence purchased after July 29, 1999, with a mortgage in good standing.
If you make additional payments on top of your regular mortgage payment schedule, you may reach the 78-percent mark before the scheduled date. In this case, you can request that the lender cancel your PMI by submitting a written application, but you have to meet certain criteria, depending on your lender. For example, you may have to have a good payment history, prove that you don't have a second mortgage, or provide an appraisal. The lender can choose to reject your request if your home value has gone down.
When you take out a loan, you can request an amortization schedule from your lender. This document shows the timeline of your mortgage payments and how each payment affects your balance. The lender has to terminate your PMI if you reach the mid-point of the amortization schedule before you reach the 78-percent mortgage balance. For example, the lender has to terminate the PMI at the 15-year mark for a 30-year mortgage.
You could get rid of PMI through other avenues. For example, you could take out a second mortgage so your first mortgage is only 80 percent of the property value. You can also do this by refinancing your mortgage. You'll do a current appraisal for the new lender and you won't have to pay PMI premiums if you only borrow up to 80 percent of the appraised property value. This way, you may also get a lower interest rate from the new lender. There are costs involved in all such approaches that could outweigh the benefits of getting rid of the PMI premiums, so evaluate and compare all the factors and outcomes.
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