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WalletPrep worksheet · Housing

What is PMI and how do you get rid of it?

Name ____________________ Date __________

Key ideas

  1. PMI protects the lender, not you. If you fall behind, PMI pays the lender. You can still lose the home to foreclosure.
  2. You can ask to cancel at 80%. When your balance is scheduled to hit 80% of original value, or you pay it there early, ask in writing.
  3. It must end automatically at 78%. Your servicer must stop PMI when the balance is scheduled to reach 78% of original value, if you are current.

Vocabulary

Private mortgage insurance
Insurance a lender usually requires on a conventional mortgage with less than 20% down. You pay for it, but it protects the lender if you stop paying.
Down payment
The cash you pay toward a home's price yourself at closing. A mortgage covers the rest.
Refinancing
Replacing an existing loan with a new one, usually to get a lower interest rate, a lower payment or a different term.
Loan Estimate
A standard three-page form a lender must give you within three business days of a mortgage application, showing the rate, payment and closing costs.
Credit score
A 3-digit number, usually from 300 to 850, that predicts how likely you are to repay debt on time. Lenders use it to set rates.
Principal
The amount you borrowed, or the part of your balance that is still owed, not counting interest.

Work it out

Sam buys a $300,000 home with 10% down, a $270,000 loan at 6.5% for 30 years. Her PMI is $112.50 a month, an assumed figure for the example.

  1. Original home value
  2. 20% equity needed
  3. Balance to request removal
  4. Loan at closing
  5. Balance to request removal
  6. Principal to pay down
  7. On schedule
  8. With $200 extra a month
  9. PMI avoided by paying extra

Check yourself

  1. Your home's original value is $400,000. At what balance can you first ask to cancel PMI?

    • A. $312,000
    • B. $320,000
    • C. $360,000
    • D. $200,000

  2. Who does PMI protect?

    • A. You, if you lose your job
    • B. The seller
    • C. The lender, if you stop paying
    • D. Your homeowners insurer

  3. On a 30-year loan, when must PMI end even if the balance is above 78%?

    • A. After 15 years, the loan's midpoint
    • B. After 5 years
    • C. After 10 years
    • D. Never

Your turn

If you pay PMI, find your PMI disclosure or call your servicer and ask for the date your balance is scheduled to reach 80% of original value. Put that date on your calendar with a reminder to send a written cancellation request.

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Answer key

What is PMI and how do you get rid of it?

Work it out

  1. Original home value$300,000
  2. 20% equity needed− $60,000
  3. Balance to request removal= $240,000
  4. Loan at closing$270,000
  5. Balance to request removal− $240,000
  6. Principal to pay down= $30,000
  7. On schedule7 yr 11 mo
  8. With $200 extra a month4 yr 10 mo
  9. PMI avoided by paying extra$4,162.50
  1. 80% of $300,000 is $240,000. Sam must pay her $270,000 balance down by $30,000 before she can ask to cancel.
  2. With her $1,706.58 payment alone, the balance reaches $240,000 in month 95. Automatic removal at 78%, $234,000, would come in month 109.
  3. Adding $200 a month gets her to $240,000 in month 58. That is 37 fewer months of PMI: 37 × $112.50 = $4,162.50 saved.

Check yourself

  1. B. $320,000 You can ask at 80% of original value: $400,000 × 80% = $320,000. It ends automatically at 78%, $312,000.
  2. C. The lender, if you stop paying PMI insures the lender against loss if a borrower stops paying. It doesn't protect the borrower from foreclosure.
  3. A. After 15 years, the loan's midpoint PMI must end the month after the midpoint of the loan's original term, which is 15 years on a 30-year loan, if you are current.