Private mortgage insurance (PMI) is a monthly charge added to your payment when you take a
conventional loan with less than 20 percent down. The purpose is to protect the lender in case you default on your mortgage.
PMI is not a scam. It enables people to buy a home without having a large down payment. This, in turn, promotes home ownership, real estate wealth through leveraging, better quality neighborhoods, and greater stability in the U.S. economy. Because of PMI, you can get more house for your money.
Even still, you want to stop paying this extra charge as soon as possible. Here’s how it works.
With a conventional loan, you can stop paying the monthly PMI when either:
1) You notify the lender that you have 20 percent equity and then the lender verifies it by ordering an appraisal. You cannot order your own appraisal, because that would open the door to possible bias. However, you do pay for the appraisal, so you want to be certain of the value and your equity.
2) Your PMI will be automatically dropped when you have 22 percent equity with your loan balance being at 78 percent of purchase price. This law (enacted for loans funded after
July 1999) prevents lenders from collecting PMI long after the risk factor has been reduced. However, with real estate values rising in many areas, you want to keep a look-out for what similar homes in your neighborhood are selling for. That way, you can stop the PMI payments sooner.
FHA Has MI, not PMI.
With an FHA loan, you take mortgage insurance, not private mortgage insurance. The rate is calculated differently, and MI remains for the life of the loan, regardless of equity, if your down payment was less than 10 percent. With less than 10 percent down, the only way to eliminate MI on an FHA loan is to refinance into a conventional loan. If you were one of the rare individuals who took an FHA loan with 10 percent or more down payment, then MI can be dropped after 11 years.
Should You Refinance to Drop MI or PMI?
If you can drop MI or even PMI and lower your term and/or interest rate at the same time, then refinancing probably makes good financial sense. However, you need to look at both your new monthly payment and your loan term in order to make that determination.
If you are in California or Washington state and would like me to take a look at your situation to see whether or not refinancing is a good move, send me an email via my Ask a Question page or contact me using the info below.
Envoy Mortgage is a full service mortgage lender.
Carolyn Warren, NMLS # 1284134, (206) 919-4542