It used to be that when someone applied for a conventional loan, the down payment required could be as much as 20 or even 30 percent or more. That kept many buyers away from home ownership simply because they couldn’t save up enough for a down payment. In the late 1950’s however an insurance company developed a policy that allowed borrowers to make a down payment as low as 5 percent of the sales price. The insurance policy covered the difference between 80 percent of the sales price, the mortgage, and the down payment.
This private mortgage insurance, or PMI policy is still in use today and conventional loans that are underwritten to Fannie Mae and Freddie Mac guidelines require private mortgage insurance if the amount borrowed is greater than 80 percent of the appraised value, absent any subordinate financing.
However, property values change over time and at some point in the future the property value would rise where mortgage insurance is no longer needed yet the borrowers are still making monthly mortgage insurance payments. How can borrowers get rid of PMI if they feel their loan balance is at or below this 80 percent threshold?
Guidelines today require that a private mortgage insurance policy automatically be dropped when the loan balance naturally amortizes down to 78 percent of the original purchase price. For example, a couple buys a home and take out a $300,000 mortgage and put down less than 20 percent and have a monthly PMI payment. 78 percent of $300,000 is $234,000. In this scenario using a 30 year fixed rate loan, the mortgage balance amortizes down below $234,000 in just over nine years. This is incumbent upon lenders to monitor this balance and remove PMI automatically at this point.
Another way to remove PMI is to consider the current market value of the property. Let’s say the same couple have lived in the property for a few years and have seen property values in their neighborhood go up since they originally moved in. They originally made a 10 percent down payment and have a monthly PMI payment. They contact their lender and ask how to cancel the monthly PMI. The lender orders a new appraisal to confirm that yes, property values have risen and the current loan balance is somewhere near 70 percent of the newly appraised value both due to natural amortization and an increase in home values.
There are a few guidelines that must be met but they’re relatively simple ones. The loan has to be seasoned for at least two years. Also, if the current loan-to-value is 80 percent or lower, more than five years must have elapsed since the original loan was taken out. If the loan-to-value is 75 percent or better, the five year seasoning requirement is waived but must still honor the two-year requirement. Finally, PMI can be removed in this manner as long as the borrowers have made their monthly mortgage payments on time.
If you currently have a PMI payment and think it’s probably no longer needed, give me a call and let’s talk about how we can remove your PMI payment while lowering your monthly mortgage payments. You might be able to save some money. You don’t have to wait nearly 10 years to get rid of PMI.