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Bye, PMI

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Posted On: 11/02/2016

Question: I originally bought my home for $335,000 in Dec 2014, and, as of today, owe $175,000. My mortgage rate is 3.65 percent. I had a foreclosure six years ago this past spring. I am told I can remove the private mortgage insurance (PMI) in 2017 on my new home by refinancing it, as it will have been seven years since my foreclosure. My loan-to-value (LTV) ratio is 50 percent as of right now. I’m not sure why I would have to refinance in order to remove it. Is this a way for lenders to make more money?

Answer: Under the Homeowners Protection Act, the government has established several standards for ending PMI coverage. First, you can request an end to coverage once your loan balance reaches 80 percent of the original amount. Second, in most cases, the lender must cancel PMI coverage once the loan balance is down to 78 percent of the original debt.

According to the Consumer Financial Protection Bureau (CFPB), a request to end PMI coverage must be in writing, you cannot have a junior lien against the property, the value of the property must be at or above the original sale price, you must have a good payment history and you must be current on the loan.

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For an automatic cancellation, the CFPB explains, “even if you don’t ask your lender to cancel PMI, your lender still must terminate PMI on the date when your principal balance is scheduled to reach 78 percent of the original value of your home. You also need to be current on your payments on the anticipated cancellation date. Otherwise, PMI will not be terminated until shortly after your payments are brought up to date.”

There is also a “final” cancellation standard. “Your lender,” says the CFPB, “must terminate PMI if you reach the midpoint of your loan’s amortization schedule before the 78 percent date. The midpoint of your loan’s amortization schedule is halfway through the life of your loan. Most loans are 30-year loans, so the midpoint would occur after 15 years have passed.”

Three thoughts: First, ask your lender if PMI will be canceled if you make a prepayment to bring down your balance. Get your answer in writing.

Second, rather than refinance you might want to take the cost of refinancing and put it into a prepayment. The reason is that your current interest rate, 3.65 percent, is very much in the ballpark for 30-year fixed-rate financing as this is written.

Third, if you do want to refinance you certainly do not have to wait seven years after a foreclosure. That may have been true just after the mortgage meltdown, but it is certainly not the case now. For example: Fannie Mae and Freddie Mac allow borrowers with foreclosures on their records to refinance in as little as two years. Under its “Back to Work” program, the FHA allows borrowers that suffered from an “economic event” to get financing in 12 months. VA borrowers have to wait at least two years after a foreclosure to get a new mortgage.

Speak with lenders for details and specifics.

Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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