I have a mortgage with PMI, what happens to PMI when I get to the 'safe' LTV ratio?
Does my payment stay the same and more money goes to paying off interest or principal? Does my payment drop?
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In the US, for most mortgages:
- You have a right to have PMI cancelled when you reach 80% LTV.
- The bank must cancel PMI for you at 77-78% LTV, unless you are behind on payments.
- The bank must cancel PMI at the midpoint of the loan amortization.
The rules for how you compute LTV vary. Usually it's based with current value. With FHA loans, you cannot have the property re-assessed -- LTV is based on the original loan amortization.
Note that in the wake of the housing crisis, assessors have suddenly become very conservative with valuations, so be prepared to fight over the valuation.
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I'm not as interested in the valuation aspect, though I know its important. I wanted to understand what happens to that PMI cost. If I interpret this right, paying down a mortgage is a good idea if the budget allows for it but it is a GREAT idea to pay down that first 20% really aggressively. After the PMI is gone, there is that much more money going to principal with no change to the total mortgage payment. – Freiheit Sep 14 '11 at 17:01
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2Duff is correct, but one clarification - the bank must cancel PMI based on the natural amortization. If you make a principal prepayment they won't necessarily remove PMI immediately. – JoeTaxpayer♦ Sep 14 '11 at 17:38
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Joe - What is "natural amortization"? Does that mean by making regular payments, with no prepayment, I am expected to hit the LTV target at date X. Even if I get the LTV target before X because of prepayments, I will still make PMI payments until X. It also seems that there is a 'must cancel' limit but the bank 'may cancel' it sooner if they are so inclined. – Freiheit Sep 14 '11 at 17:43
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Yes, I think you got it. By "natural amortization" I mean the date you would hit 80% based on the amortization table the day you close. If you get there sooner due to prepayments, the bank can request an appraisal. This was already answered some time ago, I need to search to find the post and the links where I document my sources. Sorry, there's stuff I recall for certain, but the trick is to find the backup. – JoeTaxpayer♦ Sep 14 '11 at 20:04
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From Getting Rid of PMI: Per the federal Homeowners' Protection Act, you can ask that your PMI be canceled when you've paid down your mortgage to 80% of the loan, if you have a good record of payment and compliance with the terms of your mortgage, you make a written request, and you show that the value of the property hasn't gone down. What's more, when you've paid down your mortgage to 78% of the original loan, the law says that the lender must automatically cancel your PMI. (So in this case to prove it hasn't gone down, an appraisal is in order)
But all of this doesn't answer the question. The PMI is a separate line item, once it's removed, your total monthly payment drops. You are welcome to keep it in, and indicate it should be a prepayment of principal, if that's your wish, but that's up to you, it's not automatic.
In researching this the first time, I ran into an article How to Calculate PMI Costs in which an example is given where a 91% LTV $200K loan has a PMI cost of $1000/yr. So, the impact of not having that extra $20K or so is to pay what amount to an extra 5% on the last $20K of the loan. The PMI doesn't scale over time. When you are $10K away from 80% LTV, you still pay the $1K/yr. For this reason, if you absolutely must go over 80% LTV, I'd suggest shopping for a bank that will permit the excess to be a home equity loan. At least the payoff of that 2nd loan in totally in your control.
answered Sep 14 '11 at 21:33
