Minnesota Attorney General's Office
1400 Bremer Tower
445 Minnesota Street
St. Paul, MN 55101
M - F 8 am - 5 pm
PRIVATE MORTGAGE INSURANCE FACT SHEET
If someone offered you the option to spend $200- $350 now and in return save $20 to $100 per month for years to come, you probably would think it is a scam. If you are a homeowner, however, there is a chance that you may qualify for such a deal if you are paying for Private Mortgage Insurance, or “PMI.”
WHAT IS PMI?
Most homeowners pay each month into an escrow for taxes and insurance. These escrow payments, together with an amount for principal and interest, make up the monthly mortgage payment. However, a significant number of homeowners also pay another type of charge each month known as “PMI,” or Private Mortgage Insurance.
PMI typically is required for conventional loans when the homeowner makes a downpayment of less than 20%. PMI protects the lender (not the borrower) from losing money when a homebuyer defaults on a mortgage loan. PMI is not cheap — it averages over $35 per month and can cost more than $100 per month. With substantial monthly payments of benefit only to the lender, it is in the homeowner’s interest to stop paying PMI as soon as possible. According to industry standards, since 1991 annual operating profits in the PMI industry have skyrocketed more than 500% to $2.7 billion.
Under both federal law and Minnesota law, you can request cancellation of PMI once your home equity reaches 20%. Equity is the difference between your current principal balance on your loan and the value of your house. For example, if your house value is $100,000, you have 20% equity if the current principal balance on your mortgage is $80,000 or less.
But there is a big difference in how equity is calculated under federal and state law. Because federally chartered lenders do not have to abide by state law, you must first determine whether your lender is state or federally chartered.
Under federal law, a homeowner does not benefit from market appreciation. Federal law does not allow a homeowner to cancel PMI until the homeowner has made payments that reduce the principal amount owed under the mortgage to 80% of the home’s purchase price. For example, if a home’s purchase price was $100,000, the homeowner could not cancel the PMI until the principal amount of the mortgage was reduced to $80,000. Because the first years of a mortgage payment are mostly interest, a homeowner would have to wait years, often a decade or more, before reaching the required 20% in equity as determined by federal law.
Minnesota law, on the other hand, allows homeowners to benefit from market appreciation. Under Minnesota law, the value of your home is based on what it would be worth if you sold it today. For instance, if you bought your home for $100,000 with 5% down and you house is now worth $130,000, you probably are eligible to cancel PMI under Minnesota law.
In a market where home values are depreciating, it is substantially more difficult to get rid of PMI. Federal law does not allow a homeowner to cancel PMI if the value of the home has declined below its purchase price. Similarly, under Minnesota law, you will not be able to cancel PMI if the outstanding principal owed on your mortgage loan is greater than 80% of your home’s current market value.
GETTING AN APPRAISAL
You will need to hire an appraiser to establish the market value of your home. The appraisal process also means you are taking a risk that the market value of your house will be enough to establish the 20% in equity. If the appraisal value falls short, you have paid for the appraiser and must still continue to pay PMI, as well. So you should feel confident in the market value of your house before you ask for the appraisal.
The first thing you should do is to determine whether your mortgage is state or federally chartered. You can usually find out with a quick call to your lender. If you have a state chartered mortgage, Minnesota law gives you the right to shop for and pick an appraiser, as long as he or she is “reasonably acceptable” to your lender. A state chartered lender cannot reject your appraiser without reason and cannot require you to pick only from a short list approved by the lender. Nonetheless, before you pay for the appraisal, contact your lender and make sure that the appraisal is acceptable. If your mortgage is from a federally chartered lender, Minnesota statues do not apply and you must contact the lender directly to begin the appraisal process.
Be sure to ask your lender if there are any other obstacles to canceling PMI before you seek out an appraiser. PMI only applies to owner-occupied homes. You cannot cancel PMI during the first two years of the loan and you cannot have a history of late payments. Contact your mortgage lender for details.
PMI is not charged on FHA or VA loans. If you have one of these types of loans, you are not eligible to cancel your mortgage insurance using the PMI cancellation law.
Minnesota law also requires that your lender send you a notice each year when you are paying for PMI and may qualify for cancellation. Don’t wait for the notice! If you qualify for PMI cancellation, start the cancellation process now. Every month you wait is another wasted PMI payment.
If you have a complaint or question regarding PMI or you are unsure whether your lending institution is state or federally chartered, you may contact the Minnesota Attorney General’s Office by mail, phone or electronically as follows:
Office of Minnesota Attorney General Lori Swanson
1400 Bremer Tower
445 Minnesota Street
St. Paul, MN 55101
TTY: (651) 297-7206