How to get rid of PMI, or private mortgage insurance
What is PMI, or private mortgage insurance?
PMI is a type of mortgage insurance that protects the lender in case you default on your mortgage.
Homebuyers who use a conventional mortgage with a down payment of less than 20 percent are usually required to get private mortgage insurance, or PMI. This is an added annual cost — about 0.3 percent to 1.5 percent of your mortgage, usually, although it can vary. According to Freddie Mac, each month, borrowers generally may pay between $30 and $70 for every $100,000 of the loan principal in PMI. How much you pay depends on your credit score and the amount of your down payment. Your PMI is recalculated each year based on the current size of your loan, so it will decrease as you pay the loan off.
Option 1: Pay down your mortgage for automatic or final termination of PMI
Under the HPA, the mortgage lender or servicer is required to drop your PMI when one of two things happens:
The provider must automatically terminate PMI when your mortgage balance reaches 78 percent of the original purchase price, provided you are in good standing and haven’t missed any scheduled mortgage payments.
2: Request PMI cancellation when mortgage balance reaches 80 percent
Instead of waiting for automatic cancellation, you have the right to request that the servicer cancel PMI once your loan balance reaches 80 percent of the home’s original value. If you’re making payments as scheduled, you can find the date that you’ll get to 80 percent on your PMI disclosure form or request it from your loan servicer.
If you have the cash to spare, you can get there faster by making extra payments.
You can prepay the principal on your loan, reducing the balance, which helps you build equity faster and save on interest payments. Even $50 a month can mean a dramatic drop in your loan balance and total interest paid over the term of the loan.
Refinance to get rid of PMI
When mortgage rates are low, as they are now, you might consider refinancing your mortgage to save on interest costs or reduce your monthly payments. At the same time, refinancing might enable you to eliminate PMI if your new mortgage balance is below 80 percent of the home value. It’s a double dose of savings.
The refinancing tactic works if your home has gained substantial value since the last time you got a mortgage. For example, if you bought your house four years ago with a 10 percent down payment, and the home’s value has risen 15 percent since then, you now owe less than 80 percent of what the home is worth.
Reappraise your home if it has gained value
In a rising real estate market, your home equity could reach 20 percent ahead of the original schedule. It might be worth paying for a new appraisal. If you’ve owned the home for at least five years, and your loan balance is no more than 80 percent of the new valuation, you can ask for PMI to be cancelled. If you’ve owned the home for at least two years, your remaining mortgage balance must be no greater than 75 percent.