You bought a house with a home mortgage loan and a down payment of less than twenty percent. This means you were automatically required by your lender to buy PMI, or private mortgage insurance. Through this process, you have come to realize that PMI is insurance that benefits the mortgage lender, not you. Don’t worry. You are not alone. Many new homeowners find themselves in the same situation as you. The good news is that there are multiple ways to rid yourself of your PMI. Read on to learn how to get rid of PMI.
What Is the Purpose of Private Mortgage Insurance?
Private mortgage insurance is for the benefit of the mortgage lender, not the buyer. A PMI is simply a type of insurance that protects a lender should you (the buyer) have to default on your loan. PMI isn’t just for conventional mortgages. Even FHA loans, which allow for a very low down payment and are regulated from the Federal Housing Administration, require a similar payment called a mortgage insurance premium. It’s very common for homebuyers to find themselves saddled with an extra $100-$300 PMI payment each month, depending on the house’s purchase price. The typical lender will require you to buy PMI if the down payment on your home is less than twenty percent.
In order to get into their new homes quicker, many homeowners will end up putting less than twenty percent down. There’s absolutely nothing wrong with this means of getting a new home. However, it’s also in your best interest to own over twenty percent equity in your home and learn how to get rid of PMI as soon as possible.
Why Should You Learn How to Get Rid of PMI Quickly?
PMI is non-refundable money. Nobody wants to buy PMI, but if you’ve had to purchase it, you have probably been looking forward to getting rid of it since the day you got it. PMI is a costly expense for any piece of real estate. On an average $200,000 home loan, the PMI costs between 0.5 percent and 1.35 percent of the loan amount annually. This means PMI would cost you between $1,000-$3,000 per year or $83-$250 per month.
This cost is certainly something you will want to eliminate as soon as possible. The good news is that you don’t have to be stuck with private mortgage insurance for the life of the loan
Your private mortgage insurance is there for the sole purpose of protecting your lender. As the homeowner, you will never see any money back from your PMI. Therefore, it is in your best interest to rid yourself of your PMI as soon as possible. This will not only allow you to rid yourself of the burden of PMI, but it will also put you one step closer to financial freedom.
When Am I Eligible to Get Rid of My Private Mortgage Insurance?
The first step in getting rid of PMI is determining if you are even eligible to do so. The simple answer is that you are eligible to cancel your PMI once you have obtained more than twenty percent equity in your house. A slightly more complex but more accurate way to view it is that you can start to cancel your PMI once the remaining loan-to-value (LTV) ratio is eighty percent of the value of the home.
What Are My Options for Getting Rid of My PMI?
Once you have determined if you are eligible to get rid of PMI, you need to look into what option for how to get rid of PMI will work best for your circumstance. There are primarily four options to choose from. The first option is to wait for the automatic cancellation of the PMI. The second option is to request an early PMI removal. The third option is to get a new home appraisal. The final option is to refinance your mortgage.
1. Wait for Automatic Cancellation
The first option available when it comes to getting rid of PMI is simply to wait for the automatic cancellation. In time, your private mortgage insurance will fall away automatically. In terms of conventional loans, your lender is legally required to cancel your PMI when your loan balance is at or below 78 percent of the home’s value.
Even though your private mortgage insurance will automatically fall away, it’s a good idea to keep track of this timeline for yourself. It’s never a good idea to entirely rely on your lender to be in charge of canceling your PMI. If you do plan to simply wait for your PMI’s automatic cancellation, try to obtain a written copy of your lender’s PMI cancellation requirements and schedule. This will ensure that you know when monthly payments are supposed to be stopped and also allows you to monitor your overall PMI progress.
Pro Tip for How to Get Rid of PMI:
If you don’t want to find a workaround but you still want your PMI gone as quickly as possible, see if you can pay off your mortgage faster. Depending on your mortgage, you could make larger monthly mortgage payments or extra payments. These strategies can help you pay off your mortgage — and get past the 78% threshold — faster.
2. Request an Early PMI Removal
If you’re not the type to sit around and watch things move around idly, you probably don’t want to wait for the automatic cancellation of your PMI. If this is a scenario you find yourself in, you can go ahead and take the necessary steps to request an early PMI removal.
However, before you make your official request for an early PMI removal, you will want to have several things in order. The most important element is that your mortgage balance has reached eighty percent of your home’s original value.
Once your mortgage balance has reached eighty percent of your home’s original value, your lender must legally cancel your PMI upon your written request. Along with having reached a mortgage balance of eighty percent of your home’s original value, you need to meet three other criteria for a smooth early PMI removal request.
1. Payment History
You need to have maintained a good payment history. What does a good payment history mean? The most important factor is that you have no mortgage payments over thirty days late during the last twelve months.
2. Good Credit Conditions
It would be best if you didn’t have any other liens such as a second mortgage, problematic lines of credit, or any home equity loans.
3. New Appraisal
You should have an appraisal conducted to prove that your home’s value hasn’t fallen from the initial sales price.
Getting these elements in order for yourself will make an excellent case of an early PMI removal request.
3. Get a New Appraisal on Your Home
Another practical option for deciding how to get rid of PMI is going straight to a new appraisal. If the property values in your area have risen significantly, you are in a prime situation to request an early PMI cancellation based on the home’s current value.
Another situation that could call for a new appraisal scenario would be if you’ve done some significant home improvement projects since you purchased the house. Kitchen upgrades, bathroom upgrades, or room add-ons can significantly increase the market value of any home. The increase in your home’s value from these home improvement projects could make you a prime candidate for canceling your PMI.
However, before you go to the trouble of hiring an appraiser, be sure to check out your specific mortgage lender’s rules when it comes to home appraisals.
Pro Tip for How to Get Rid of PMI Through a New Appraisal:
Be careful! This only works if your property’s appraised value will have increased. Let’s say your house was originally valued at $200,000, and your remaining mortgage is 85% of that value — $170,000. Then a drop in property value to $190,000 means that your remaining mortgage is suddenly 89.47% of the new home value and you have less home equity.
4. Refinance to Get Rid of PMI
If your home loan hasn’t reached eighty percent of its loan-to-value ratio, there is still a chance that you may be able to get rid of your PMI through refinancing. Refinancing is basically getting a new loan for your current home.
It can have additional benefits, such as letting you access a lower interest rate if your credit score and financial situation has improved or mortgage rates have generally decreased. You could even change your mortgage type, such as from a 30-year mortgage to a 15-year mortgage or vice versa. While refinancing is an option to get rid of your PMI, keep in mind that it is often the last resort.
Why Is Refinancing a Risky Option?
If getting rid of your PMI does come down to refinancing, there are some specific things that you need to know.
First, you need to calculate if refinancing to remove your PMI will outweigh the closing costs of the refinancing process. In some cases, refinancing costs might actually cost more than paying your PMI. Your best bet is to get a no-closing-cost refinance. Alternatively, you might roll the closing costs into your loan balance.
Also, be sure to reach out to your lender or utilize a refinance calculator to see if refinancing is a realistic option for your situation. Personal finance and economic factors can create higher interest rates, which can make refinancing more expensive over the loan term.
Now that you know how to get rid of PMI, you can pick the best option for you. By following this practical guide’s advice, you will be free of your PMI faster. Here are even more ways to save money in your monthly budget.
