Buying a home with a low down payment or refinancing with minimal equity is made possible by private mortgage insurance. PMI coverage protects a lender of a conventional home loan, allowing the lender to receive reimbursement if you default. In exchange for taking on a riskier loan, the lender requires you to pay a PMI premium for a specified amount of time. By law, your lender must automatically teminate the coverage by a scheduled date. However, you'll have to make a case for it to remove PMI any sooner.
Automatic PMI Termination
Your lender must automatically remove PMI from your loan when your principal balance is scheduled to reach 78 percent of the home's value at purchase. This rule, found in the Homeowners Protection Act also requires that you are current on the mortgage at the time of the scheduled PMI termination. Note that the act requires termination on the scheduled date, regardless of whether the principal is actually paid down to 78 percent of the home value. For example, even if you prepaid principal or your home's value declined, the lender must cancel on the scheduled date.
Canceling PMI Before Scheduled Termination
The act also allows you to request PMI cancellation when the principal balance reaches 80 percent of your home's original value. Borrower-requested cancellation requires:
- Evidence that the home's value hasn't fallen below the original value
- Proof that there are no subordinate liens on the property
- A good payment history
- The balance is either scheduled to reach 80 percent of the original value or it actually reaches 80 percent based on additional payments you've made
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According to the Consumer Financial Protection Bureau, your lender generally must grant a borrower-requested cancellation if you submit the request in writing and meet all requirements.
Determining Termination Dates
The amortization schedule in your original loan documents sets out all payment dates and their corresponding loan balances. You also should have received a PMI disclosure form with your loan documents, which provides the date on which your balance is scheduled to reach 80 percent of the original value. Ask your lender for this form if you do not have it. Original value is defined as the sales price or the appraised value of the home when the loan was made -- whichever is less. Therefore, check your purchase contract and the home appraisal report to obtain the value.
Loan-to-value, or LTV represents balance owed relative to home value, as a percentage. To calculate a 78 percent or 80 percent LTV, multiply the home's original value by .78 or .80. Compare the resulting balance to your amortization schedule to find out what date corresponds to 78 percent or 80 percent LTV.
PMI Premium Refunds
Some borrowers prepay their PMI premium annually or pay all of it upfront at closing. In these cases, the lender may be holding an unearned premium, for which you're entitled to refund after PMI is removed. Refunds are due within 45 days of PMI removal.