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  Ask Dr. Don By Don Taylor, Ph.D., CFA, Bankrate.com    

Making PMI go away

Dear Dr. Don,
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

Dear Sanjeev,
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.

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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 price appreciation.

Fannie 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 have declined.

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 of purchase.

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 horizon.

-- Posted: July 28, 2004

  More questions from Dr. Don

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See Also
Can you get rid of your PMI payment?
Canceling PMI with a second mortgage
Financial advice glossary
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