I recently bought a home with 10 percent
down and financed the remaining 90 percent with the PMI option.
A couple of months after closing, I was able to arrange enough
money to pay another 10 percent of my home value, thus making
the LTV ratio 80 percent or less.
When I contacted my lender, they say that
even though the LTV is less than 80 percent, I am stuck with
paying the PMI for at least two years according to the Homeowners
Protection Act of 1998. Is this true? And is there any way
to get away from paying the PMI? Please respond and thanks
for your time.
-- Sanjeev Savings
The Homeowner's Protection Act doesn't establish a seasoning
requirement, but your loan documents may have established
that two-year minimum. In this case, the seasoning requirement,
if it exists, would be spelled out in your loan documents.
Your lender should be able to tell you if this is the case
and provide you with a copy of the requirement.
Originating lenders typically write the loans
to standards established by Fannie Mae or Freddie Mac. Fannie
and Freddie have seasoning requirements that keep PMI (private
mortgage insurance) in place for a minimum number of payments.
Those seasoning requirements differ depending on whether the
reduction in LTV (loan-to-value) comes about from additional
principal payments, as in your situation, or from your home's
Mae speaks to this topic in a FAQ page on its Web site:
In general, private mortgage insurance for a
loan originated on or after July 29, 1999, that is secured
by the borrower's one-family principal residence or second
home will be canceled at the borrower's request when the
loan-to-value ratio reaches 80 percent based on the value
of the home at loan origination. In order to have private
mortgage insurance canceled at this point, the borrower must
have a good payment history and the property value must not
Private mortgage insurance on mortgages owned
by Fannie Mae can also be canceled at the borrower's request
when the LTV reaches 75 percent based on the current value
of the home as established by a new appraisal, provided that
the borrower has a good payment history and that the loan
is at least two years old.
Under the Homeowners Protection Act of 1998,
lenders don't have to consider a home's appreciation in determining
the loan-to-value for dropping private mortgage insurance.
The language of the law requires that borrowers pay down the
balance of the mortgage to reach "80 percent of the original
value of the property" before they can ask that PMI be
dropped. The law also defines the original value as the lesser
of the purchase price, or the appraised value at the time
Your 10 percent down and 10 percent in additional
principal payments, however, does lower the LTV to the point
where you can request that the lender drop the PMI payment,
unless your loan is subject to a seasoning requirement.
Refinancing is an option if you don't want to
wait out a seasoning requirement. Weigh the closing costs
and interest rate differential against the potential savings
from dropping PMI. If you do face a two-year seasoning requirement,
your PMI savings would only be measured out to that two-year
-- Posted: July 28, 2004