What is Private Mortgage Insurance?
If you bought a home with less than 20% down, you probably had to add private mortgage insurance (PMI) to your conventional loan. PMI can increase your monthly payment by hundreds of dollars, but you don’t have to keep paying for it forever.
What Does Mortgage Insurance Cover?
PMI helps your lender stay out of the red if you don’t pay back your loan. PMI doesn’t give you any kind of protection or benefit as a buyer other than letting you put down less than 20% to purchase a home.
Three Ways to Remove Private Mortgage Insurance
1. Automatic Removal. At specified milestones, PMI termination is “automatic.”
The lender or servicer is required to immediately terminate PMI whenever your mortgage balance reaches 78 percent of the original purchase price. In other words, if you are in good standing and have not missed any mortgage payments, and your loan-to-value (LTV) ratio drops to 78 percent, then your lender/servicer is required to remove PMI. However, you may have to remind them your equity has increased.
Additionally, the servicer is required to stop PMI payments halfway through your amortization schedule. For instance, the halfway mark would be reached after 15 years if you had a 30-year loan.
2. Request Removal. When the remaining balance on your mortgage reaches 80%, you can ask to have PMI canceled.
Once your loan balance reaches 80% of the home’s original value, you have the option to ask the servicer to cancel PMI rather than waiting for automatic termination. On your PMI disclosure form, you may find the date when you’ll reach 80 percent if you’re paying your bills on time. (or you can request it from your servicer).
Making additional payments will allow you to remove PMI sooner, if you have the extra money. You can prepay the principal on your loan to lower the balance, which will speed up the process of building equity and save you money on interest costs. Even $50 a month can result in a significant reduction in your loan balance and the total amount of interest paid during the loan’s lifetime.
Some borrowers opt to make a one-time lump sum principal payment or even an additional annual mortgage payment. You will reach the 20% equity threshold quicker if you make extra payments.
How manual requests work:
- Submit a written cancellation request for PMI to your lender or servicer.
- Have a solid payment history and be current on your mortgage payments.
- Fulfill additional lending criteria, such as not having any existing liens on the property (i.e., a second mortgage).
- You could be required to obtain a new appraisal.
- If the value of your property has decreased, you might not be able to cancel PMI since you do not currently have the 20% equity.
3. Refinance. PMI can also be eliminated by refinancing.
You might think about refinancing your mortgage to lower your monthly payments or save on interest costs while mortgage rates are low. At the same time, if you refinance and your new mortgage balance is under 80% of the value of your property, you might be able to get rid of PMI. In this way, refinancing can offer a double dose of savings.
The refinancing strategy is effective if your home has appreciated significantly since you last applied for a mortgage. For instance, if you put 10% down when you purchased your home four years ago and the value of the property has increased 15% since then, you currently owe less than 80% of what the house is worth. In some situations, you are able to refinance into a new loan without paying PMI.
When refinancing, you should consider the possible savings from the new loan terms and dropping PMI against the closing costs of the refinance.
When In Doubt, Talk To A Strategic Guide
Working with a Path & Post Strategic Guide is a different kind of real estate experience. We are always here for you before, during, and after your real estate journey. Feel free to contact your agent anytime or reach out to our client care team at 770-720-4663.
