PMI: Why You Need It and How to Get Rid of It
With few exceptions, most homeowners purchasing a house with less than 20 percent down have to buy private mortgage insurance — PMI. This insurance, which makes home ownership possible for so many purchasers, covers the lender in case you default, and it generally adds between $50 to just over $100 to your monthly payments. You may be stuck with it for now, but can you get rid of it?
Eventually, you can. You reach a point where the bank basically sees that you have enough equity in the house so the insurance isn’t necessary anymore. Federal law actually requires banks to cancel PMI when you hit certain thresholds. As the law puts it, this happens when “the principal balance of the mortgage is first scheduled to reach 78 percent of the original value of the secured property.” This is referred to as the loan-to-value ratio — the outstanding loan divided by the value of the property.
Even if you haven’t reached the magic “78,” you can request cancellation at other times. The servicer is supposed to cancel the insurance at the halfway point — so, 15 years into a conventional 30-year mortgage.
Also, you have the right to ask for earlier cancellations — at 80 percent. The Consumer Financial Protection Bureau gives instructions for doing this:
- Your request must be in writing.
- You must have a good payment history and be current on your payments.
- Your lender may require you to certify that there are no junior liens (such as a second mortgage) on your home.
- Your lender can also require you to provide evidence (for example, an appraisal) that the value of your property hasn’t declined below the value of the home when you first bought it. If the value of your home has decreased, you may not be able to cancel your PMI.
Of course, to claim cancellation under any of the rules, you should have a clean payment record.
You still can catch a break
While you’re waiting to meet these thresholds, however, you might be able to deduct your PMI costs. This is one of the tax breaks Congress keeps threatening to cancel and then renews at the last minute. Also, in the past, the tax break started to phase out when adjusted gross income reached $100,000, and it’s only good for mortgages taken out in 2007 or later. However, any of these deduction provisions can change, so consult a tax adviser.