For many who have had the opportunity to buy a home, they have also had to purchase what’s called private mortgage insurance. Private mortgage insurance is a policy that protects lenders in case a borrower defaults on a loan.
However, under the Federal Homeowners Protection Act, borrowers are allowed to have PMI removed from a home loan in two ways, either formally requesting the termination of the policy from a lender or automatic termination of the policy.
Having 20 percent equity in a home is key. If a borrower takes out a conventional or jumbo mortgage and pays 20 percent of the home’s value as a down payment, the lender isn’t likely to require a PMI policy for that borrower. So, if another borrower can only afford a 10 percent down payment, how long can they expect to pay for that insurance?
Provided borrowers are current with their payments, PMI will automatically be terminated once the principal balance left on the mortgage is 78 percent of the home’s value. If borrowers aren’t current on their payments, the insurance will not be terminated until they are.
Final termination will also occur when borrowers have reached the midway point of their loan terms. So if borrowers have a 30-year mortgage, the PMI will be terminated once 15 years have passed. According to the Consumer Financial Protection Bureau, this scenario isn’t likely to happen unless the borrower’s mortgage has an interest-only period or a balloon payment. More often than not, borrowers will reach the 78 percent threshold before they reach the midway point of their mortgage payment schedule.
The third way borrowers can cancel their PMI is to request it formally. That can happen once they have paid 20 percent of the principal balance on their homes. That is when they have 20 percent equity in the home. When borrowers receive a disclosure form from their insurer, the date when borrowers will have paid off 20 percent of the principal (provided all payments are on time) will be included. If a borrower pays extra to reach that threshold earlier than the projected date, they can formally request, in writing, to have the insurance terminated. Something important to remember is that to be eligible for PMI termination, borrowers have to have a good payment history and there cannot be any other liens on the homes such as a second mortgage, home equity line of credit, or a home equity loan.
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