A borrower takes out a loan for $99,000 on a $100,000 property. The loan has a 5

Question

A borrower takes out a loan for $99,000 on a $100,000 property. The loan has a 5% interest rate and is a 10 year fully-amortizing FRM that makes monthly payments. Because of the high LTV on this loan, the lender requires that the borrower pay PMI. Assuming the house value remains constant and that the borrower remains current on payments, when will the borrower no longer have to pay PMI? (i.e. when will PMI automatically be cancelled?) State your answer in number of months. Round any fractional months up to the nearest month.

Explanation / Answer

As per Homeowners Protection Act of 1998, home mortagages signed on or after July 29, 1999, to automatically terminate PMI once the homeowner reaches 78% LTV. Hence in our case, once loan balance reaches $78,000 or below the said amount, PMI will automatically be cancelled.

So PMI would stop in 32nd Month.

Loan Amount                       99,000 No. of Years                                10 Payments per term                                12 Rate 5% Monthly Installment                          1,050

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