Can you still get
rid of PMI despite being underwater on your mortgage? The answer may surprise you.
PMI, or private mortgage insurance,
is what you have to buy if you put down less than 20 percent on your mortgage. It enables your lender to recover some of its
losses in the event you default and is typically billed as part of your monthly mortgage statement.
It’s not
cheap. The cost is typically equal to about an additional half percent in interest on your mortgage, so it’s no surprise
that homeowners seek to get rid of it as soon as they can.
The Old Way - Rising
Home Values
During the boom years, most homebuyers didn’t worry too much about PMI, because the assumption
was they’d be able to drop it in a few years as their home grew in value. The rules for PMI allow you to request that
it be cancelled once your mortgage balance equals 80 percent of the value of your home, and the way home values were increasing
back then, that didn’t take very long.
Now that home values have plummeted, many homeowners have resigned
themselves to paying for PMI for a long, long time. If you only put 10 percent down and the value of your home has fallen
by one-third, who knows when you might finally reach the 80 percent mark?
Automatic
PMI Cancelation on Underwater Loans
However, just because your home value has plummeted, it doesn’t
mean you can’t get rid of PMI within a reasonable time. According to Andy Wilson, a Fannie Mae spokesperson, you’re
entitled to have PMI cancelled automatically as soon as your mortgage balance falls to 78 percent of the original
value of your home – the purchase price. You’re entitled to that regardless of how much your home may have fallen
in value, or how far underwater you are on your mortgage.
Many homeowners have forgotten about this provision, because
they only focused on reaching an 80 percent loan-to-value ratio. The difference between the two guidelines is that you can
request to drop PMI when your mortgage balance equals 80 percent of the current
appraised value of your home, but your lender must automatically cancel it for you when your balance
falls to 78 percent of the original value at the time you took out the mortgage.
Larger mortgage payments won't speed the process
Unfortunately, you can’t hasten
this process along by making larger mortgage payments or paying down your loan to 78 percent in one lump sum. According to
Wilson, you don’t qualify for automatic PMI cancelation until the date your mortgage balance is scheduled to reach 78
percent, according to your amortization schedule – and you have to be current on your payments as well.
That’s
too bad, because homeowners might be able save some significant money if they could eliminate two or three years of PMI payments
with a lump sum payment of several thousand dollars toward their mortgage balance. It also means you can’t accelerate
your payments in order to have a better shot at qualifying for a HARP underwater refinance, which is easier to do when you
don’t have PMI.
High-risk, Pre-1999 Mortgages Excluded
Lenders
don’t have to cancel your PMI at the 78 percent mark if you have a high-risk mortgage, although they still have to do
so at the halfway point of your amortization – i.e., 15 years through a 30-year mortgage. Your loan can’t be classed
as high-risk just because you’re underwater, according to the Federal Reserve. And if you have a jumbo (non-conforming)
mortgage, your PMI isn’t automatically cancelled until you reach a 77 percent loan-to-value ratio.
Unfortunately,
you don’t qualify for automatic PMI cancellation if your mortgage was originated prior to July 29, 1999. That’s
the effective date of the Homeowners Protection Act of 1998, which gave borrowers the right to automatic PMI cancellation,
so mortgages taken out before that date aren’t covered.
Under the law, your lender is supposed to update
you every year on your mortgage status and how soon you can cancel PMI. It’s a good idea to pay attention to this and
make sure the insurance is canceled when the time comes. If not, you’re entitled to recover any overpayments that occur
after the date cancelation was supposed to occur.
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