How long do I have to pay for PMI?

Question

Hello,
I had taken a loan about 2 years ago and have been repaying my installments regularly. As far as I remember I am also paying the premiums for the Private Mortgage Insurance (PMI) but how long would it continue as now my loan balance would have reduced after paying 24 installments. Does anyone have any idea? Thanks

Tanner Loyd · Answer

Jon pretty much has this covered but I'll add a couple points.

PMI removal is based on law AND the investor guidelines. Your servicing co. has no control over this. They can research the guidelines and point you in the right direction but... They will arrange the new appraisal and the appraisals are VERY VERY conservative. The appraiser they choose is picked for a reason. There is no funny business involved with the appraisal but they will be lower than what a purchase appraisal would probably come back at.

If this property is an FHA loan then MIP ( FHA's term for PMI) will be on the loan for a minimum of 5 years no matter the LTV. (pretty sure that's still accurate though I haven't been in the field for two years now)

As for the repairs, you have to document the repairs with supporting receipts. The repairs won't be considered unless they are structural, or permanent improvements. Things like paint, carpet and the like do not count in the mix. Things like an in-ground pool, an addition, garage, mechanical upgrades will usually qualify. Each investor has their own guidelines. Make sure you call the servicing co. and get as much detail as possible. You don't want to pay $300-$500 for an appraisal if it won't help... and could possibly hurt.

Make sure you know which value (ie. purchase price or appraised value) because that has a huge impact. You may have a home that could sell for $200,000 but if you paid $175,000 then you may have to use the lower of the two.

At 80% LTV you have to actually call and request the removal as it won't be done automatically. If you hit the 78% threshold then it has to be removed immediately by law.

All of the above only pertains to owner occupied homes. Second homes and investment properties have to hit a different set of standards, usually 65% LTV.

Be cautious and make an informed decision.

Jon Holdman · Answer

The old advice still applies, and even more so now.  Call the lender and ask what it takes to get it removed.

I suspect you may find a very unpleasant answer.  If you bought a house in spring of 2007, its very likely worth less now than then.  So, they will say they still want a current appraisal and want you to get the balance below 80% of the new appraisal.  If that new appraisal is lower than when you bought, you'll have to pay even more.  If the 78% crtiteria applies (loan balance vs. the original appraisal), you might be able to pay 20% or so and get down below that.  Check with the lender.  They will have a specific, documented process, and can tell you exactly what you need to get it removed.

As far as getting a loan to pay down the mortgage, that depends.  There's no chance you'll get a HELOC to do it, because you have no equity.  Even if you could convince someone you're going to use the HELOC just to pay down the loan, they will also want a new appraisal, and will likely only go to 90% of the current values.  So, you'll have to come up with 10% or more of the balance elsewhere.

Are you talking about a $50K house or a $500K house.  If you're talking $50K, and so need about $10K, and you have a job and good credit, you may be able to get that from a local bank or a credit union.  Or, even off credit cards, though I'm not sure I'd recommend that approach.  If you need $100K, you'd certainly have to have some asset to use as security.

Chris Johnson · Answer

I know this topic is old and collecting dust...

But I am in the same situation here.  I bought my house 2 years ago and paid everything on time regularly. I got 99% loan on the house.  My PMI is nuts...as close I can see it's costing me about 250 a month.

So this is my question...Is it possible to get a loan of some kind to pay down the mortgage to eliminate the PMI.  Would it make more sense to do so? Even if the interest is higher, I think it might be better to do this.  Your thoughts please....

PS I am still in the learning curve so be nice!  :lol:

Jim Gordon · Answer

PMI can normally be removed when the current appraised value of the property reaches an 80% LTV on the loan. You can do this with a current appraisal and show that the value has went up. The lender will choose the appraiser. The other way to get PMI to go away is to pay down to 78% of the original loan value. 
Be carefull about paying for an appraisal most areas have seen a drop in property values in the last 18 months.

Jon Holdman · Answer

Sorry, the way I said that was confusing.   I should have said current loan balance vs. the original loan basis.  Whatever, purchase price or refi appraisal that was used to determine the original percentage.

The loan in question was a refi.  So, the calculation was based on the appraised value at the time of the refi.  It was a 90% refi, based on that appraisal.  I had to be at 80% or 78% vs. that old appraisal.

So, if you put 19% down, you would only need to reduce the loan balance by 1% of whatever the 19% was based on.

Jon

Nick Albin · Answer

I believe thats right Reflex.

Scott Weaner · Answer

Jon, is it loan balance or balance compared to purchase price?  Or is it balance compared with the appraisal value?

In other words, if, for some reason I put down 19%, would one need to only accumulate 1% more, or 20% of the remaining loan balance?

Scott Weaner · Answer

Jon, is it the loan balance that must get below 80%, or does the equity need to get above 20%?  Also, can't appreciation be considered in equity percentage?

Jon Holdman · Answer

Scott,
In my experience, which is limited in this regard, the lender would not count appreciation.  It was based strictly on the balance vs. the original loan amount.  On the loan where I dealt with this, I could pay for an appraisal when the balance reached 80%, and they would take it off it the value hadn't declined.  Otherwise, they automatically took it off at no charge at 78%.  They said that if I had substantial, documented improvements, they would consider those.  But, not pure appreciation.

I do recommend checking with the lender.  I'm pretty sure this is not a "one size fits all" question.

If there really was a lot of appreciation, it might be worthwhile to refi to get a no-PMI loan.

Jon

Jon Holdman · Answer

The best way to get a firm answer is to check with your lender.  Laws for PMI payments have been changing, and there may be local laws that apply, too.

As a general answer, the PMI should be automatically removed with the loan hits 78-80% of the original loan balance.  If you have made improvements to the house, and you can substantiate those, you might be able to get it off sooner.  You will probably have to pay for an appraisal, which would be a few hundred dollars.  The lender will probably not consider any appreciation, but only actual improvements.

As far as how much you still owe, it will depend on the details of the loan.  This is easy to calculate with Excel or a financial calculator.  The FV (future value) function will calculate the balance at some point in the future.  Here's an example:
price $100,000
down payment 10%, 10,000
Amount financed $90,000
Rate 6%
Term 30 years
Payment $539.60 (P&I only, your actual payment may include taxes, insurance, and PMI)
payments made 24
balance $87,721.41, 87.7% of original price

To get the balance in this example down below 80%, you would need to make 89 payments, about 7 and a half years.  Of the first payment, $450 is interest and $90 is principal.  After 89 payments, $400 is interest and $140 is principal.  If you were to add an extra $100 to your payments from the start, the time to get to 80% would go from 89 payments to 47 payments.  Even if you were to start adding $100 after 24 months in this example, you would be at 80% after 36 more months instead of 65 more months.

Do call you lender to find out exactly what your situation is.

Jon