Private mortgage insurance

In short

If you are buying a home with less than a full down payment, you have probably heard the words private mortgage insurance and felt your stomach drop a little. Let me put your mind at ease, because this is something you can understand and manage. It is a monthly charge that protects your lender, not you, when you put down less than a set share of the price. You can often ask to have it removed once you have built enough equity, which just means the part of the home you truly own. Federal law also requires it to end on its own at a set point. So ask your lender for the dates in writing, keep a calendar note, and write your request letter early. A small effort on your part can save real money.

The whole of it

What it is

A friend of mine once told me he thought private mortgage insurance was there to protect his family if he lost his job. I understood why he thought so. The name sounds kind. But the policy protects the lender. If you stop paying and the house sells for less than you owe, the insurer pays the lender part of that loss.

You pay for it anyway. That is the part that surprises people. You are buying protection for someone else, and the price is added to your monthly bill.

Lenders usually ask for it when your down payment is under the current figure, which the official source publishes each year of the home's value. Put another way, they ask for it when your loan is above the current figure, which the official source publishes each year of what the home is worth. That share is called the loan to value ratio. A smaller down payment means more risk to the lender, so the lender wants a backstop.

Some loans work differently. FHA loans, which are backed by the Federal Housing Administration, have their own mortgage insurance with its own rules. VA loans have no monthly mortgage insurance at all. If you have one of those, ask your lender which rules apply to you.

How it works

You have probably seen this on a loan estimate and skipped past it. It is worth a slower look. The cost of private mortgage insurance is set by the insurer and depends on things like your credit score, the size of your down payment, and the type of loan. A stronger credit score and a bigger down payment generally bring a lower price.

Most people pay it as part of the monthly mortgage payment. Some pay it up front at closing, and some split it between the two. Your loan estimate will show which one you have.

The good news is that it does not last forever. The Homeowners Protection Act of 1998 gives you two ways out on most loans. First, you can ask your servicer, the company that collects your payment, to cancel it once your balance reaches the current figure, which the official source publishes each year of the home's original value. You must be current on your payments, and the lender may ask for proof that the home has not lost value. Second, the law says the servicer must end it automatically when your balance is scheduled to reach the current figure, which the official source publishes each year of the original value.

There is also a backstop. If you are current, the insurance must end the month after you reach the midpoint of your loan term. The Consumer Financial Protection Bureau explains all of this on its website, and it is worth a read.

The numbers, and where to find yours

I once watched a neighbor spend an hour hunting for a paper he had in a kitchen drawer the whole time. Let me save you the hunt. You need only a few numbers, and they sit in a few places.

Your loan estimate and your closing disclosure both list your mortgage insurance cost. These are the forms your lender must give you before you sign. Look at the section on projected payments. It shows the monthly amount and how long it is expected to last.

Your monthly mortgage statement shows your current balance. Your original home value is the lesser of the purchase price or the appraised value at closing. That figure is on your closing paperwork.

Your servicer must also tell you, once a year, about your right to cancel. If you never got that notice, call and ask. The insurance premium rates themselves come from the insurer, so ask your lender for the rate that applies to you.

A worked example

Let me tell you about a woman named Dana. She buys a house for 250,000 dollars. She puts down 12,500 dollars, which is 5 percent of the price. She borrows 237,500 dollars.

Her lender charges private mortgage insurance. Say her rate is 0.6 percent of the loan each year. That is 237,500 times 0.006, which comes to 1,425 dollars a year. Divided by twelve months, it is 118.75 dollars a month.

Dana wants to know when she can ask to cancel. Suppose the rule for a request is a balance at 80 percent of the original value. Eighty percent of 250,000 is 200,000 dollars. She starts at 237,500, so she needs to bring her balance down by 37,500 dollars.

That is a long road on regular payments alone. But Dana has a plan. She adds 200 dollars a month toward the balance. Over five years that is 200 times 60 months, or 12,000 dollars in extra payments. Her regular payments also cut the balance, and the amount depends on her rate and term, which her servicer's amortization schedule will show.

Here is the useful part. Every extra dollar she pays brings the date closer. And every month she skips the cancel request after reaching that mark costs her 118.75 dollars. Over twelve months that is 1,425 dollars she did not need to spend.

Dana calls her servicer the month she hits the mark. She sends a written request. She asks what proof they need. She keeps a copy of everything.

Where it goes wrong

Nobody plans to get this wrong. It happens in small ways. A friend of mine waited for the insurance to end on its own and paid for a few extra months before he noticed. The law does end it at a set point, but the request route can be sooner, and only you can start it.

Here are the common trouble spots. You may miss the chance to cancel because you never asked. Your servicer may want an appraisal, which means a paid estimate of the home's value, and that costs money. If your home has lost value, the lender may refuse to cancel even at the right balance. Late payments can also block a request.

Another trouble spot is thinking a rise in home value counts automatically. It may not. Some servicers allow a new appraisal to count, and some have waiting periods. Rules differ, and the servicer's own policy matters here. Ask before you spend money on an appraisal.

Some people also mix up private mortgage insurance with other insurance. Homeowners insurance covers damage to your house. Title insurance covers problems with ownership. Mortgage life insurance is a different product. None of these replace or cancel private mortgage insurance.

Finally, watch for a refinance. A new loan resets the clock. If your new loan is still above the threshold, you may pay again.

Questions to answer before you leave this page

Do you know whether your loan carries private mortgage insurance, and how much you pay each month? Have you found your original home value on your closing paperwork? What is your current balance, and how far is it from the request point in your servicer's terms? Have you asked your servicer what proof they need, and whether they require an appraisal? Do you know the date the insurance must end on its own? Could an extra payment each month bring your request date closer, and what would that cost you? Have you set a reminder so the date does not slip past you?