Getting Rid of PMI When Underwater
Can you still get rid of PMI despite being underwater on your mortgage? The answer may surprise you.
PMI, or private mortgage insurance, is what you have to buy if you put down less than 20 percent on your mortgage. It enables your lender to recover some of its losses in the event you default and is typically billed as part of your monthly mortgage statement.
It's not cheap. The cost is typically equal to about an additional half percent in interest on your mortgage, so it's no surprise that homeowners seek to get rid of it as soon as they can.
The Old Way - Rising Home Values
During the boom years, most homebuyers didn't worry too much about PMI, because the assumption was they'd be able to drop it in a few years as their home grew in value. The rules for PMI allow you to request that it be cancelled once your mortgage balance equals 80 percent of the value of your home, and the way home values were increasing back then, that didn't take very long.
Now that home values have plummeted, many homeowners have resigned themselves to paying for PMI for a long, long time. If you only put 10 percent down and the value of your home has fallen by one-third, who knows when you might finally reach the 80 percent mark?
Automatic PMI Cancelation on Underwater Loans
However, just because your home value has plummeted, it doesn't mean you can't get rid of PMI within a reasonable time. According to Andy Wilson, a Fannie Mae spokesperson, you're entitled to have PMI cancelled automatically as soon as your mortgage balance falls to 78 percent of the original value of your home - the purchase price. You're entitled to that regardless of how much your home may have fallen in value, or how far underwater you are on your mortgage.
Many homeowners have forgotten about this provision, because they only focused on reaching an 80 percent loan-to-value ratio. The difference between the two guidelines is that you can request to drop PMI when your mortgage balance equals 80 percent of the current appraised value of your home, but your lender must automatically cancel it for you when your balance falls to 78 percent of the original value at the time you took out the mortgage.
Larger mortgage payments won't speed the process
Unfortunately, you can't hasten this process along by making larger mortgage payments or paying down your loan to 78 percent in one lump sum. According to Wilson, you don't qualify for automatic PMI cancelation until the date your mortgage balance is scheduled to reach 78 percent, according to your amortization schedule - and you have to be current on your payments as well.
That's too bad, because homeowners might be able save some significant money if they could eliminate two or three years of PMI payments with a lump sum payment of several thousand dollars toward their mortgage balance. It also means you can't accelerate your payments in order to have a better shot at qualifying for a HARP underwater refinance, which is easier to do when you don't have PMI.
High-risk, Pre-1999 Mortgages Excluded
Lenders don't have to cancel your PMI at the 78 percent mark if you have a high-risk mortgage, although they still have to do so at the halfway point of your amortization - i.e., 15 years through a 30-year mortgage. Your loan can't be classed as high-risk just because you're underwater, according to the Federal Reserve. And if you have a jumbo (non-conforming) mortgage, your PMI isn't automatically cancelled until you reach a 77 percent loan-to-value ratio.
Unfortunately, you don't qualify for automatic PMI cancellation if your mortgage was originated prior to July 29, 1999. That's the effective date of the Homeowners Protection Act of 1998, which gave borrowers the right to automatic PMI cancellation, so mortgages taken out before that date aren't covered.
Under the law, your lender is supposed to update you every year on your mortgage status and how soon you can cancel PMI. It's a good idea to pay attention to this and make sure the insurance is canceled when the time comes. If not, you're entitled to recover any overpayments that occur after the date cancelation was supposed to occur.