Do you have an underwater mortgage with Private Mortgage Insurance (PMI)? If so, you might think you're stuck with those extra payments until you can get your loan equity back into positive territory. Fortunately, that isn't necessarily the case. In fact, most borrowers are entitled to have PMI automatically canceled once they've had their mortgage for a certain amount of time, and it doesn't matter how much your home may have decreased in value or how far underwater you may be on your loan.
Private Mortgage Insurance, or PMI, is the insurance you're typically required to buy when you take out a conventional mortgage with less than 20% down. Most homeowners know that you can ask to have it canceled once you reach 20% equity in your home (an 80% loan-to-value ratio for example), either by paying down your loan balance, a rise in your home's value or a combination of both.
What many borrowers don't realize, however, is that you're legally entitled to have PMI automatically canceled once your loan balance falls to 78% of your home's original value at the time you took out the mortgage. That's true even if your home has fallen in value and you owe more on the mortgage than your home is currently worth.
That's the law as established by the Homeowner Protection Act of 1998, which sets the rules for PMI cancellation in general. Though there are some limitations and guidelines:
- You must reach the 78% figure through the normal amortization of your loan. That is, you can't speed up the process by making extra payments.
- You must be current on your mortgage payments with no missed payments during the previous 12 months.
- You don't qualify if you have any second liens on the property, such as a piggyback loan, home equity loan, a line of credit or any other type of second mortgage.
- For certain types of high-risk mortgages, the loan balance must be paid down to 77% of the original home value before automatic PMI cancellation is required.
- The law applies to single-family residences, multi-unit dwellings and investment residential properties, but not to vacation homes.
- The mortgage must have originated on or after July 29, 1999, which is when the Homeowners Protection Act came into effect.
- The law only applies to private mortgage insurance. It doesn't apply to homeowners with lender-paid mortgage insurance (LPMI) or those with FHA or VA mortgages, which have their own mortgage insurance.
Taking Timelines into Account
Depending on the size of your down payment, it usually takes from five to nine years to reach the 78% mark through normal amortization on a 30-year mortgage. You can use a mortgage calculator with an amortization table feature or contact your mortgage servicer (the company you send your payments to) to find out when exactly this will happen for you.
For the purpose of automatic PMI cancellation, your original home value is the lower of either the purchase price of your home or the appraised value of your home at the time the mortgage was taken out. If you refinance your mortgage after buying your home, the countdown to 78% starts all over again with the new loan.
Making up for Missed Payments
If you are unable to qualify for automatic PMI cancellation due to missed payments, the law still requires that PMI be canceled once you reach the 15-year mark on a 30-year mortgage, provided you are current on your payments at that time or it will become effective as soon as you are current thereafter.
Here's an example of how it works. Say you bought your house in 2006 for $200,000 with a 10% down payment on a 30-year fixed-rate mortgage at 5.5%. Not including mortgage fees, that would give you a starting loan balance of $180,000. 78% of $200,000 is $156,000, which would take you just over eight years to reach through normal amortization.
Even if your home value had fallen to $140,000 in the meantime, you would still qualify because automatic cancellation is based on the original value of your home at the time you took out the loan, not the current value.
The Bottom Line
Under the law, you don't have to request that your PMI be canceled once you reach the 78 or 77% mark, assuming you meet the other qualifications. Your mortgage servicer is supposed to return all PMI premiums and cancel your PMI automatically within 45 days.
If you've already reached that point and you're still being charged for PMI, contact your mortgage servicer to inquire. If it turns out you've met the requirements and your PMI was supposed to be canceled, you're entitled to a refund for the excess payments. If there is indeed a violation, the act gives a borrower two years after the violation is discovered to lodge an action.