Home Mortgages, Wells Fargo and PMI

There seems to be a ton of misinformation on the web on how the PMI interacts with the home mortgage and I thought I would blog about my experience, as it might help someone out there. The following are my experiences with Wells Fargo. So the applicability to your situation might vary

PMI – Private Mortgage Insurance, is insurance that I had to pay monthly, as my down-payment was less than 20%. (I have a conventional 30 year loan). The PMI is used to make up any difference in the home price, in case I defaulted on the loan and Wells Fargo had to fore-close the loan on me. The important thing here is that the PMI is required whenever your Home To Loan value ratio is greater than 80%. (LTV definition: (Current outstanding loan amount)/(Home Purchase Price)).

One of the laws that govern how long PMI applies to a loan is called the Home Owners Protection Act of 1998. It specifies for how long PMI can be charged to a home loan and in addition also governs automatic termination of the HOP as well as buyer requested termination. Unfortunately, the act is not easy to understand and it led to many questions for me (such as, will the PMI be dropped if I reached a 80% LTV and will it be dropped if I reached that point within one year of getting the loan).

Here are my specific experiences with Wells Fargo:

• I was able to call in and ask for a letter to be sent to me that specified how I could drop the PMI. The document specified that the PMI would be dropped when the loan reached 78% LTV. The letter also specified the exact amount (as of the date of the letter) that I could pay towards the principal so as to reach the 78% LTV to drop the PMI.
  In addition the document also provided other ways in which the PMI could be dropped. Specifically, by having the house appraised at a higher value (the %, etc was specified in the document). But in this economy, I was sure that my house would not have appraised for more (and probably would have appraised for less than my purchase amount). So this document told me exactly what I had to plan for, to get rid of the PMI.
• The day that I got the LTV to 78% I called Wells Fargo so that I could request cancellation of the PMI. To my pleasant surprise, they told me that it had been already been removed automatically. About 2 weeks after the LTV reaching 78% I got a PMI deletion notice letter from Wells Fargo. (Although, it looks like the PMI does get automatically deleted by Wells Fargo, I would suggest that you call Wells Fargo to make sure that the PMI will get cancelled).

Notes:

Wells Fargo FAQ on PMI: https://www.wellsfargo.com/mortgage/faq/privatemortgage

Money Girl’s Quick and Dirty Tips: http://moneygirl.quickanddirtytips.com/how-to-cancel-private-mortgage-insurance-pmi.aspx. This page has tons of in-depth information on PMI. I strongly suggest you read this article as it covers all the different situation under which the PMI can be cancelled.

Federal Reserve document on the Home owners protection act: http://www.federalreserve.gov/boarddocs/supmanual/cch/hpa.pdf

Disclaimer:

I am not a banker or a lawyer or a mortgage loan specialist. So the above information might not be 100% accurate. The above post is based only on my experiences.