When the PMI will get removed?

[Martis]

If I do a conventional loan today with 10% down I will need to pay PMI.

If a year from now I pay another 10% the pmi will fall automaticly or I still need to pay PMI until the scheduled date for PMI to fall off with no extra payments?

How are the contract written most of the times?

I appreciate any input!

Thank You

[Tarkovsky]

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@Martis wrote:

If I do a conventional loan today with 10% down I will need to pay PMI.

If a year from now I pay another 10% the pmi will fall automaticly or I still need to pay PMI until the scheduled date for PMI to fall off with no extra payments?

How are the contract written most of the times?

I appreciate any input!

Thank You

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Federal law provides three ways that PMI on a conventional mortgage can fall off:

1) You can request a "cancellation" of PMI from your lender when you accumulate 20% equity in the home's original value, either through regular payments or advanced payments. This has to be done in writing, and typically requires that you have good payment history. The lender may also require that your home has a new appraisal performed to determine its current market value against the original sale price. In the event that the home's value has declined, the lender may refuse a cancellation at 20% since they could potentially still face a financial loss if you went into foreclosure and the home couldn't be sold for at least as much as you still owed on the mortgage.

2) The PMI will automatically be "terminated" when you reach the date at which your amortization schedule projects that you will reach the 22% equity threshold of the original sales price of the home. You do not need to make a request for this; the lender has to automatically cancel it by law. It's also important to point out that the lender has to terminate the PMI at the aforementioned date even in the instance that the home's value has depreciated.

3) The PMI will automatically "terminate" when you reach the midpoint of your amortization schedule (e.g., at year 15 in a 30-year mortgage) even if you still haven't accumulated 22% equity in the home. From what I understand this is fairly rare, but is possible with certain loan types (e.g., loans with initial interest-only periods).

[Martis]

So in my case would be #1. Let say they do the appraisal and the home lost value and I have no choice other than to wait until #2.

When the the #2 would apply they will calcultae 22% from the initial loan value or they will consider the appraisal when I did #1. I know this is a tricky question

Thank you for your time, it is really appreciated.

[Tarkovsky]

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@Martis wrote:

So in my case would be #1. Let say they do the appraisal and the home lost value and I have no choice other than to wait until #2.

When the the #2 would apply they will calcultae 22% from the initial loan value or they will consider the appraisal when I did #1. I know this is a tricky question

Thank you for your time, it is really appreciated.

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My understanding is that they have to calculate the 22% on the basis of the original home value (i.e., sales price), not the new appraisal. So in another sense, the clause concerning the appraisal in Scenario 1 is designed to protect the lender, whereas the absence of the appraisal clause in Scenario 2 is designed to protect the owner.

I think of it like this: when you request a PMI cancellation (as in Scenario 1) you're asking the lender to do you a favor that they're not really obligated to do, so it's understandable that they would want to have some leverage to protect themselves against potential financial loss (hence, the new appraisal). But in Scenario 2, those are simply the terms of the agreement that they signed with you; therefore, they have to play by those rules, even if the reality isn't beneficial to them (as in the case where the home has depreciated in value).

[Tarkovsky]

Here's a link to the actual law (the Homeowner's Protection Act of 1998) covering the PMI rules: http://www.federalreserve.gov/boarddocs/caletters/2004/0405/CA04-5Attach1.pdf. Pages 2-4 cover all three scenarios, and it does confirm that Scenario 2 holds regardless of changes in home value:

"There is no provision in the automatic termination section of the Act, as there is with the borrower-requested PMI cancellation section that protects the lender against declines in property value or subordinate liens."

[DallasLoanGuy]

there will be mention of it in the promissory note as well.

[Martis]

Thank you very much for all the replies! Your time is appreciated.