"Private Mortgage Insurance or PMI: What it is and How to Remove It"

PMI, or private mortgage insurance, comes into play with any down payment that is less than 20% of the purchase price. It is an added expense that could run $100 or more per month, depending on the purchase price and your down payment amount.

PMI is issued by companies such as MGIC Investment Corp., and it provides some protection to the lender if you default on your mortgage. If you default, the insurance company pays the bank the difference between 20% and the amount you actually put down. If you put down 5% and default, the insurance company will pay the bank the other 15%.

HOW MUCH DOES IT COST?

Your PMI premium will get paid monthly as part of your mortgage financing payment. To calculate how much you will pay each month, divide the mortgage amount by the following:

• 1500 if you put 5% down
• 2300 if you put 10% down
• 3700 if you put 15% down

For example, if you buy a triplex for $200,000 and put 10% down ($20,000), your monthly PMI payment would be $78.27 ($180K loan divided by 2300).

CANCELING PRIVATE MORTGAGE INSURANCE

Again, the only point of private mortgage insurance is to protect the lender if you put less than 20% down. Therefore, once you own 20% equity in the property you should be able to eliminate this expense. There are 3 primary ways to cancel:

• Your lender may do it automatically
• You could make a request once you've paid down your mortgage balance enough
• You could make a request if the property's value has increased

AUTOMATIC CANCELLATION

Back in the day, it was not uncommon for the insurance company to keep charging PMI forever, since many borrowers didn't know they could cancel. But new regulations introduced in 1999 have forced insurance companies to automatically remove this coverage once you own at least 22% of the property (based on the original purchase price).

Assuming a 6% interest rate on your mortgage, it will take roughly 11 years to own 22% of the property if you put 5% down, 9 years if you put 10% down, and 6 years if you put 15% down.

Note that PMI will not be cancelled automatically if:

• You have a VA or FHA loan instead of a conventional mortgage
• Your loan was signed before July 29, 1999
• Any of your payments have been late
• You are considered high risk

REQUESTING CANCELLATION

Of course you do not have to wait for the automatic cancellation at 22%. You can write to the insurance company and ask them to cancel your PMI coverage as soon as you hit 20% equity. This can happen in one of 2 ways: you could pay down the loan balance over time or the property could increase in value.

In the latter case, you may have to pay for a property appraisal to prove the increased value. You'll have to weigh the cost of the appraisal against the amount you'll save when you remove private mortgage insurance to see if it's a good deal for you. In most cases, it will indeed be worth it.

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