PMI Loophole ** Why is an appraisal required 78% of ORIGINAL Loan to Value?

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I’ve been prepaying on my mortgage principal, and I will be reaching the 78% LTV in the next couple of months, but as I read the letter from my mortgage company, there seems to be a problem…..the wording in the letter I just received from my mortgage lender seems a bit sneaky…. (my original mortgage was acquired by this company 1 year ago, so this is the 1st time I have received a written explanation from the current lender)

For loans made on or after July 29, 1999, your PMI, if paid by you, will automatically terminate as follows:
If you are current on your loan payments, PMI will terminate automatically on the earlier of:
1) the date the principal balance of your loan is first SCHEDULED to reach 78% of the original value of the
property, which is 1/01/2019; or,
2) the first day of the month immediately following the date that is the midpoint of the amortization period for
your loan (i.e. if you have a 30 year loan, after the 181st payment has been made).

So does this mean that even though I will be at 78% LTV in 2011, I can’t stop paying PMI until 2019?? That seems crazy. Is there anything I can do, or is this law penalizing people who actually pay it more quickly? PMI values are based on the original mortgage amount, so the numbers shouldn’t have to be recalculated.

It seems like a scam to me! Any real estate people out there who can clarify the “scheduled date” for 78%, vs. the actual date I get to the 78% ? I shouldn’t have to pay an extra 9 years when I reached the threshold already!
An appraisal would be a waste of money, because of course, at this point, I don’t think ANY real estate is worth what we paid for it 🙁 Values now have all sunk!

  1. Reply
    Your #1 fan
    May 16, 2011 at 6:08 am

    The general LTV ratio to avoid PMI is 80/20. Some mortgage lenders believe it or not will not require it. Generally, there would be a few rules for you to abide by before they forgo that. PMI is a joke of the mortgage industry. It is an insurance payment to cover the banks loss that you are paying. It has nothing to do with your losses. Your PMI should drop when you catch up to your ration in a couple of months. If not, you will need to call a lawyer and file suit against your mortgage lender for fraud. If not, it would be best to refinance with a larger, more reputable bank or a credit union. Never listen to a realtor by the way. They are useless, overpaid tour guides. Notice they cannot read! She thinks that you purchased your property a year ago when in fact your question clearly says “my original mortgage was acquired by this company a year ago.” Ha. Hey smarty pants realtor: If PMI was required as you claim, how come I have never had to pay it despite not putting down 20%?

  2. Reply
    Expert Realtor
    May 16, 2011 at 6:27 am

    I can clarify it for you…because all I am going to be doing is explaining what you signed at the closing table.

    PMI is standard in the industry. Many years ago, putting 20% down on a house used to be a STANDARD downpayment. When PMI companies came along, that permitted mortgage companies to underwrite loans when people had less to put down on a home. The higher the LTV, the more risk there is for the bank and these loans have AWAYS had the highest foreclosure rates, statistically.

    The language in your PMI agreement is NOT SNEAKY…IT IS STANDARD in the industry and has been in practice not only on your loan, but most loans.

    Yes, there is something you can do…refinance the house…that is what many do to get rid of the mortgage…but I HIGHLY doubt that you reached 20% equity in just one year when every other real estate market is DOWN in equity.

    Yes, you READ THE AGREEMENT CORRECTLY and there is no loophole around it. The reason that it is based on the original appraisal and/or sales price is to account for short-term fluctuations in the market.

    So yes, you will have to pay it. If you don’t want to pay PMI it is very simple…just come up with a 20% downpayment and you will never have to pay PMI again.

    PS: Another fact of PMI…if you are late on your payments, they DO NOT have to drop it at 80% LTV…that is a loophole in their favor that the law permits.

    The above poster is incorrect.

  3. Reply
    May 16, 2011 at 6:32 am

    Unless you have what was considered a “high risk” loan, your lender will automatically cancel your PMI after your balance reaches 78% of the appraised value or purchase price when the loan was originated. I know the wording seems to be skewed against you in your case, but there are good reasons it is written that way. First, higher interest loans won’t reach 78% as soon as they would at lower rates. With a 30 year loan, at 4.5% you reach 78% of original balance after 130 payments. At 9.0% it takes 187 payments. Second, with adjustable loans the “scheduled date” can change as the rate does. You could also make a pretty strong argument that you have been making more than the required number of payments. Even if you have only sent 50 checks, you may have made the equivalent of 100 payments.
    I recently spoke with a past client that had been making extra principal payments and made it to 78% about 18 months earlier than the contract amortization. She just received a congratulations letter from her lender with notice PMI would no longer be charged.

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