You can't shop around to find a better price on PMI, as it is calculated using a standard formula based on the amount of your loan. Most lenders require PMI on loans made for 80 percent or more of the original value (purchase price). It is required on all FHA loans mortgages. You don't have to pay it forever, but there are specific and stringent requirements to eliminate it.
Eliminating PMI on Conventional Mortgages
The Homeowner's Protection Act (HPA), which went into effect in 1999, defines circumstances under which conventional lenders must release borrowers from PMI obligations. The HPA requires lenders to cancel PMI for mortgages not classified as high-risk under certain circumstances.
- 80 percent LTV upon request: You can ask the lender to cancel the insurance once your loan-to-value (LTV) ratio reaches 80 percent of the original value of the home, which would mean you have 20 percent equity. Once the borrower initiates such a request and LTV is verified, the HPA requires lenders to agree if the borrower has a good payment history and can produce requested documentation backing up that no other liens apply and that the house is still worth as much as the original value.
- 78 percent LTK automatic termination: Once the LTV ratio reaches 78 percent, which is equivalent to 22 percent equity, the lender is obligated to automatically cancel PMI assuming the borrower is current with his mortgage payments.
According to Bankrate, "Your loan servicer is required to provide you information annually on when and how you can cancel PMI." This will help you be aware of when you are getting close to being able to request the elimination of PMI or wait for it to roll off automatically.
If you don't want to keep spending your money on this coverage, be proactive and speak up as soon as you reach 80 percent LTV. The difference between 78 percent and 80 percent may not seem much, but two percent of the balance of a mortgage loan can take quite a while to pay off. The sooner you stop paying PMI, the more of your money will go toward the principal balance of your loan.
Eliminating PMI on FHA Loans
If you have an FHA loan, the rules are different. As pointed out on TheMortgageReports, the requirements vary based on when you took out your loan.
FHA Loan Prior to 2013
If you took out an FHA mortgage before 2013, you can request cancellation of PMI if you have had the loan for five or more years, you have never been late on a payment, and your LTV is 78 percent or better (which means you have 22 percent equity or more).
FHA Loan Opened 2013 or Later
- Less than ten percent down payment: If you opened an FHA loan in 2013 or later and put less than ten percent down, your loan is not ever eligible for PMI cancellation. In this situation, your only option to get rid of PMI is to refinance your mortgage to a conventional loan without having to borrow more than 80 percent of its value. When you take out a conventional loan like this, you will not be required to take out a PMI policy.
- More than ten percent down payment: If you took out an FHA loan during this time frame and made a down payment of ten percent or more, you are eligible to cancel PMI after you have had the loan for 11 years and the LTV ratio has reached 78 percent.
If you qualify for both FHA and conventional financing, be sure to consider the cost of PMI when deciding which option is the best deal. Being able to purchase with a lower down payment is a good thing if you don't have enough money to put 20 percent down, but if you have access to the cash and qualify for a conventional loan, the ability to avoid PMI may be well worth the outlay of funds.
Eliminating PMI as Soon as You Can
As pointed out on TheMortgageReports, PMI does make it possible for borrowers to buy a home if they don't have sufficient cash on hand to put down a down payment of 20 percent or more. However, the fact remains that it is in your best interest to remove PMI from your monthly house payment as quickly as possible. It's money that you are spending on something that will never benefit you, beyond the fact that it made it possible for you to purchase a home with less than 20 percent down. Take steps to remove it as soon as you become eligible to do so.
