Ask Stacy — When Can I Stop Paying Mortgage Insurance?

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Home owners worry over mortgage and bills
Marcos Mesa Sam Wordley /

Hopefully you have home, health and car insurance. But there’s one kind of insurance you might pay for that you’d rather not: private mortgage insurance, otherwise know as PMI.

Here’s this week’s question:

I asked JP Morgan Chase if they could stop charging me mortgage insurance. They want me to pay for an appraisal. Since when did banks start charging clients for appraisals? I am already getting ripped off for the mortgage insurance. Is there no end to their greed? Is there any way around this?
– David

Understanding PMI

Private mortgage insurance is simply insurance your mortgage lender takes out to protect against the risk that you default. In other words, if your house goes into foreclosure and is sold for less than the mortgage amount. PMI reimburses the loss suffered by the lender. It is typically required if you put less than 20 percent down when you buy a house, and you’ll keep paying it monthly until your equity reaches 20 percent.

I’ve been talking about, and railing about, PMI for many years. In fact, here’s a news story I did eight years ago, back when I was wearing a suit and tie on camera.

PMI: You must pay it, but you can’t shop it

PMI benefits the mortgage lender, but you pay the premiums. And unlike virtually any other insurance policy you buy, you don’t get to shop around for the best deal. The cost varies depending on your credit score and down payment, but it typically ranges from 0.3 percent to 1.5 percent of the original loan amount every year. So if you borrow $300,000, you’re paying between $900 and $4,500 annually: That’s not chump change.

As I said above, PMI is typically required unless you have at least 20 percent equity in your home, also known as an 80 percent loan-to-value (LTV) ratio. For example, if your home is worth $100,000 and you owe $80,000, you have an 80 percent LTV and 20 percent equity. There are three ways to achieve the magic number:

  • Put 20 percent down when you buy your home.
  • Make payments until you’ve paid off enough of your mortgage to achieve 20 percent equity. At today’s rates, this will take about 10 years of minimum payments on a 30-year mortgage.
  • Your house appreciates in market value to the point that your loan-to-value ratio drops to 80 percent or less.

PMI is typically bundled with your regular monthly mortgage payment, so unless you’re on the ball, you’ll forget you’re paying it. This used to be pleasant for those collecting the premiums, because until the passage of the Homeowners Protection Act of 1998, they didn’t have to let you know that you’d achieved 20 percent equity and no longer had to pay PMI. Instead, they’d collect your PMI premiums every month for the entire 30 years if you let them.

Now the law requires lenders to cancel PMI when your loan-to-value ratio reaches 78 percent of the original value of your house. Cancellation is automatic: As long as you’ve paid down your mortgage enough to achieve a 78 percent LTV, your lender must cancel PMI regardless of your home’s current market value.

If you think your home has appreciated enough to give you an 80 percent LTV, you can start the process of terminating PMI. To terminate PMI yourself, however, you’ll have to prove you’ve got the necessary equity with an appraisal at your expense.

And that brings us to David’s question: “Since when did banks start charging clients for appraisals?” Since as long as I’ve been covering this topic, David, which is 20-plus years.

Got an FHA loan? It gets worse

An FHA loan is one insured by the Federal Housing Administration. They’re popular because they require lower down payments than some other types of loans and are generally easier to qualify for. However, that convenience comes at a cost.

FHA requires two mortgage insurance premiums (MIPs): one upfront as a lump sum and one paid monthly. The upfront part is currently 1.75 percent of the loan amount. So if you borrow $200,000, you’ll either pay $3,500 upfront, or you’ll have that amount added to your loan. The second premium is like the one discussed above: paid monthly as part of your mortgage payment.

Unlike other monthly PMI premiums, however, the FHA doesn’t let you off the hook when you reach 20 percent equity. Instead, for loans approved on or after June 3, 2013, borrowers who put less than 10 percent down will pay the monthly MIP for the life of the loan. The only way to get rid of it is to get rid of the loan by refinancing it.

If your FHA mortgage predates June 3, 2013, you’re in luck: You’ll stop paying MIP when you reach 78 percent equity.

How to get rid of PMI

If you suspect your equity is approaching 20 percent, contact your lender or loan servicer and ask them what you’ll need to do to get rid of it. The hoops you’ll have to jump through will differ by lender, so it’s important to ask and start getting your ducks in a row in advance. Here are the requirements, courtesy of the Consumer Financial Protection Bureau:

  • 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.

One strategy to avoid PMI

There is one common way to get around PMI, and I’ve used it before: You take out a second loan, known as a piggyback, so the first mortgage won’t require PMI.Example: If you’re buying a $100,000 house, you’d take out an $80,000 first mortgage. Since that mortgage has an 80 percent LTV, no PMI is required. Then you take out a $10,000 second mortgage from a different lender and come up with a $10,000 down payment to complete the transaction. Result? You’ve put only 10 percent down and you’ve eliminated PMI. This is called an 80/10/10 loan: 80 percent first mortgage, 10 percent second and 10 percent cash.

The problem? Second mortgages nearly always have a higher interest rate. So part of what you save in PMI you lose to a higher rate. In addition, the process is more complicated, and you may have to have a higher credit score to get it done. To find out if it’s worth doing, compare the additional cost of the second loan with the cost of PMI.

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The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get way more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’ve earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.

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