Home buyers in Washington who purchase a home with a down payment below 20% are often required to obtain private mortgage insurance (PMI). PMI serves as protection for lenders in case borrowers default on their mortgage payments. It’s an industrywide standard.
In most cases, PMI premiums get added onto the monthly mortgage payment, along with property taxes and homeowners insurance. So it increases the size of the monthly payments.
Private mortgage insurance offers some clear benefits home buyers, including the ability to buy a home sooner rather than later. Without PMI, most borrowers would have to make larger down payments, and many would be unable to buy a home at all.
But despite these benefits, nobody wants to pay for private mortgage insurance any longer than they have to. So let’s talk about how to cancel a PMI policy in the state of Washington.
At a glance: Homeowners who are current on their mortgage payments can request PMI cancellation once their loan-to-value ratio falls below 80%. Automatic cancellation is possible when the LTV drops below 78%.
What Is Private Mortgage Insurance and Why Is It Required?
Private mortgage insurance (PMI) is an insurance policy that protects lenders when borrowers have a down payment of less than 20%. In Washington, as in most states, PMI is required to mitigate the increased risk associated with low down payments.
By requiring PMI, lenders have some assurance they’ll be reimbursed in the event of default. This in turn allows them to offer mortgages to borrowers with smaller down payments. PMI is typically included in the borrower’s monthly mortgage payment.
General Requirements for Cancelling PMI
In Washington State, homeowners can cancel PMI once their loan-to-value (LTV) ratio falls below 80%. The LTV ratio is the amount of the mortgage balance divided by the appraised value of the home. For example, if the mortgage balance is $200,000 and the appraised value is $300,000, then the LTV ratio is 66.6%.
But that’s just one of the general requirements for canceling PMI in the state of Washington. Here’s a more complete list of requirements:
Loan-to-Value Ratio (LTV)
As mentioned above, the loan-to-value ratio plays a significant role in determining when PMI can be removed. In Washington, homeowners can initiate PMI removal when their LTV ratio reaches 80% or less. Over time, as a homeowner makes regular monthly payments, the loan-to-value ratio declines and the equity level increases.
When the LTV drops below the 78% threshold, PMI cancellation should happen automatically. But it’s still something to be aware of, in case you need to follow up with your lender or loan servicer.
On-Time Payment History
In most cases, Washington homeowners also need to be current on their mortgage payments to request the canceling of PMI. Lenders usually require homeowners to have a satisfactory payment history (with no late payments or delinquencies) within the past two years.
As it states on the Washington State Insurance Commissioner website:
“If you have a history of paying your monthly mortgage bill on time, you can ask to cancel the coverage once your mortgage is less than 80% of the home’s value or purchase price.”
To remove PMI, homeowners are often required to obtain a current appraisal of their property. The appraisal determines the current value of the home, which is used for calculating the LTV ratio mentioned earlier.
Automatic vs. Borrower-Requested PMI Cancellation
There are basically two ways to cancel private mortgage insurance in the state of Washington. The homeowner can submit a formal request, or wait for the automatic cancellation took place. Here’s the difference between these two methods.
Borrower-requested PMI cancellation: Borrowers can request that their mortgage insurance policy be canceled once their LTV ratio falls below 80%. They must also have a good payment history and no other liens on their home. Usually, the homeowner will submit a written request to the loan servicer. These are the companies that handle administrative tasks like collecting payments, maintaining records, and managing escrow accounts.
Automatic PMI cancellation: In this scenario, the mortgage lender or loan servicer will automatically cancel the borrower’s PMI policy once the LTV falls below 78%. The borrower does not need to request automatic cancellation, but it’s worth following up on.
After PMI is canceled, the borrower’s monthly mortgage payments will decrease. The borrower will no longer have to pay a mortgage insurance premium, which could save them hundreds of dollars per months.
If you are a homeowner in Washington state and you are paying PMI, you should contact your lender to see if you qualify to cancel. You may be able to save money on your monthly mortgage payments by canceling PMI.
The Benefits for Homeowners
We just talked about the primary benefit of removing mortgage insurance. It reduces the size of your monthly payments, sometimes significantly. But there are other benefits as well.
Increased Cash Flow: Removing PMI frees up extra funds that homeowners can allocate towards other financial goals. With a lower monthly mortgage payment, homeowners have more disposable income. This could be used for savings, investments, home improvements, or other expenses.
Equity Buildup: Canceling a private mortgage insurance policy could help you build home equity faster. When you no longer have to pay for PMI, that extra amount could be applied toward reducing the mortgage principal. This reduces your outstanding loan balance faster, thereby increasing your home equity.
Financial Flexibility: Removing PMI also gives Washington homeowners greater financial flexibility. They have the freedom to allocate the money they were previously spending on PMI toward other financial goals or priorities.
If you have questions about canceling your current mortgage insurance policy, contact your loan servicer for help. You can also refer to the paperwork you received when applying for and/or closing on your loan. If you had to take on PMI, you probably received a “Private Mortgage Insurance Disclosure” form with specific cancellation instructions.