Getting rid of Private Mortgages

Private Mortgage Insurance (aka PMI) is a requirement for mortgage loans with an LTV (loan-to-value) ratio of 80 percent or higher. Cash-out refinancing may have private mortgage insurance premiums for LTV ratios of 75 percent or higher. For example, if you purchase a $200,000 home and your down payment is less than $40,000 then you will have to pay a private mortgage insurance premium.

The private mortgage insurance essentially insures the lender from losses of loan defaults. In other words, if you are suddenly unable to pay your mortgage loan than the lender is insured from this financial loss. Statistics provide evidence that people who borrow greater than 80 percent to purchase a home have a greater probability of defaulting on their loan. So with a private mortgage insurance you'll be able to finance a home with a smaller down payment.

So how does one get rid of paying private mortgage insurance premiums?

Private mortgage insurance is not tax deductible as opposed to mortgage interest which may be tax deductible. Thus the goal is to stop paying private mortgage insurance as soon as possible.

You can stop paying private mortgage insurance when your loan-to-value is below 80 percent. So overtime as you are paying your mortgage payments your loan-to-value will decrease below 80 percent. It is your job to call your lender to find out the procedure for stopping the payments on the private mortgage insurace when your LTV is below 80 percent. In other words, your lender or bank will not call you when this happens. To calculate when your loan-to-value is below 80 percent, view your most recent mortgage statement and divide the principal balance by remaining by the initial home's purchase price. If it's below 80 percent then call you lender or bank.

Example of calculating your loan-to-value:

Initial Purchase Price of Home...........$200,000
Pricipal Balance of Mortgage.............$150,000

Principal Balance of Mortgage/Initial Purchase Price of Home = Loan-to-Value ratio

$150,000/$200,000 = .75 (75%)

In this instance, the loan-to-value is 75% and the private mortgage insurance payments may be stopped. The other condition where you may stop paying your private mortgage insurance premiums lies in the appreciation of your home's value. Therefore, if your home's value appreciates then you will be able to stop making payments for private mortgage insurance sooner than if had not. You are required to obtain a full appraisal of the home's value which normally costs around $300. So, for example, if you purchased your home for $200,000 and over time it appreciated to $250,000 with a recent appraisal you will be able to stop making payments when your princial balance reaches $200,000. Otherwise, if the home's value had not then you will be able to stop making payments when your principal balance reaches $160,000.

Example of calculating your loan-to-value with home appreciation:

Initial Purchase Price of Home..............$200,000
Current Home Value after Appraisal..........$250,000
Principal Balance of Mortgage...............$160,000

Principal Balance of Mortgage/Current Home Value after Appraisal = Loan-to-Value ratio

$160,000/$250,000 = .80 (80%)

The loan-to-value ratio uses either the current home's value after an appraisal or the initial purchase price of the home whichever is greater.

Monster.com. "Private Mortgage Insurance (PMI)." Online.
http://www.monstermoving.monster.com/Mortgage_and_Finance/MAI_Article/private_mortgage_insurance/

Best Mortgage Rates

Costs of Private Mortgages
Stop Paying Private Mortgages
Avoid Paying Private Mortgages
Mortgage Interest Tax Deductions