How to Get Rid of Private Mortgage Insurance (PMI)
If you purchased the house with less than a 20% down payment, the lender probably required you to buy private mortgage insurance. This also is true for any refinancing loans with less than 20% equity. Private mortgage insurance protects the lavender from the elevated risk presented by a borrower with a small down payment. It is put in place in case the borrower defaults on the loan. Think of it this way, if a borrower purchases a $300,000 home and can only put 3% down, that's just $9000 in immediate equity. If a borrower defaults on the home loan and the lender is now stuck with the property, there's not enough equity to relist to the home and pay for commissions, which means that the lender needs to pay more money to resell the home. Private mortgage insurance is put in place to cover any additional fees and costs that a lender would have to pay in order to resell the home.
Private mortgage insurance is an additional payment added onto the borrower's monthly mortgage payment and could be anywhere from an extra $50 per month to several hundred depending on the original price of the property. However, a lot of borrowers don't realize that once they have sufficient equity, PMI can actually be removed. So how does the borrower/homeowner get rid of private mortgage insurance?
Pay Down the Mortgage Faster
If you're like a lot of homeowners, you're probably just counting down the days that you can get rid of private mortgage insurance, reducing your monthly mortgage payment. Paying down your mortgage faster with a higher monthly payment is certainly one way to gain more equity faster. You can take the purchase price of your home and multiply it by 80%. Once you've paid down your mortgage to that amount, you can have the PMI removed. The Consumer Financial Protection Bureau requires homeowners to meet the following conditions in order to have their insurance removed:
- The request must be in writing.
- The borrower must have a good payment history and be current
- The lender may require proof that there are no additional liens or second mortgages on the home
- The borrower presents evidence that the value of the property has not declined. (If the value of the home has decreased, borrowers typically cannot cancel PMI)
Wait until the property is 78% of the purchase price.
The Homeowners Protection Act has a default setting, which requires a lender to cancel the PMI automatically if the mortgage drops to 78% of the original value of the home. For instance, if the original purchase price on the house was $200,000, the lender is required to cancel the insurance when the borrower's loan amount drops to $156,000. This is why it's important for borrowers to carefully monitor their mortgage balance. Although this happens automatically, borrowers need to be current on their mortgage otherwise the lender doesn't have to remove the insurance.
If interest rates drop farther than when you originally applied for the home loan, a refinance might be a better option. This will work if the new mortgage is for 80% or less of the home's current value. With a refinance you will need to pay for an appraisal, however, the appraisal will also tell you what the home is currently worth, offering you the evidence you'll probably need to get rid of the PMI. But remember, only do this if it makes financial sense. You may be removing the private mortgage insurance but if your interest rates are higher, you could actually be paying more each month with your mortgage payment.
Refinancing is the only option for getting rid of private mortgage insurance on most government-backed loan such as an FHA. You'll need to refinance from an FHA loan to a conventional loan in order to get rid of the PMI, but this is usually a positive move.
Of course, you can always sell your home if you want to do away with PMI, although that's really not what you're probably trying to do.
The mortgage hits the halfway point.
This is playing the long game but regardless of your loan to value ratio, lenders will terminate your PMI automatically when the mortgage is halfway finished. This would be in your 15 on a 30-year mortgage or 7 1/2 years on a 15-year mortgage. This is more appropriate for mortgages with the balloon payment or an interest-only loan.
Evidence that the value of the home has increased.
Another way to get rid of private mortgage insurance is to prove that the outstanding balance on your mortgage is 80% or less of the current value of the home. With increasing property values, this could very likely be the case. However, proving that the home supports a certain value could take a little bit of homework. Borrowers can purchase their own appraisal or speak to a local real estate agent about current home values in the area. Lenders will usually want solid proof, not just an opinion from an agent.
It's also important to note that most lenders will not remove PMI on mortgages less than two years old. Most lenders require at least two years of on-time payments before they'll remove the private mortgage insurance. This is something to learn ahead of time before paying for an appraisal, which could cost you up to $1000. Some lenders do require the borrower to use their own appraiser instead of choosing your own, so this would be important to ask.
Even if property values don't increase that dramatically in your area, conducting home improvements to boost the value can also work. A high rate of return remodeling project could increase the value of your home enough to remove PMI.
Just knowing about your options can put you in a better position to remove PMI early. Understand your rights and be proactive with your home loan.
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