How to get rid of PMI – Private Mortgage Insurance – A borrower must make a down-payment of at least twenty percent of a home’s purchase price in the process of applying for a home loan. When a borrower is unable to provide the required percentage, a PMI payment policy is enacted.
What is Private Mortgage Insurance (PMI)?
Also known as “Primary Mortgage Insurance”, PMI is the lender’s insurance in the event that you default on your mortgage loan. It is a financial protection plan that seeks to protect the lender in the event that the borrower stops making payment on the primary mortgage. In other words, the PMI protects the lender, not the borrower.
PMI is only offered by private companies. It is a different mortgage insurance to those being offered by public mortgage programs such as the FHA and VA mortgage.
Unlike the former, however, mortgage insurance attached to the VA and FHA loans never expire. The payment of PMI can be quite expensive and so several questions have been asked about how to get rid of PMI. .Not only can you get rid of PMI, you can also avoid it.
How to Get Rid of PMI – Private Mortgage Insurance
The PMI rate is about 0.5 to 1% of the loan amount yearly. For instance, a PMI on a $350,000 loan could cost up to $3,500 yearly assuming the PMI rate is 1%. The accumulated payments of PMI can be a burden therefore, it is important to know how to get rid of it as soon as possible.
Thankfully, the ability to remove PMI is backed by law as can be seen in the “Homeowner’s Protection Act” passed into law in 1998. Homeowners burdened by PMI have several options on how to get rid of PMI;
1. Wait for PMI Automatic Cancellation
The lender is required to cancel the PMI policy provided certain conditions have been met;
- When your Loan To Value (LTV) ratio reaches 78 percent. The lender is required to terminate the PMI provided the LTV ratio reaches 78 percent. The LTV ratio refers to the ratio between the home loan and the home value. To calculate your LTV, divide the outstanding balance by the home’s original purchase price. For instance, with a loan balance of $250,000 and a purchase price of $320,000, the LTV amounts to 78 percent.
- When the mortgage is halfway through. Irrespective of your LTV, the lender cancels your PMI when the mortgage has reached the midpoint mark. For example, the PMI will be canceled in the tenth year of a twenty-year mortgage.
2. A Written Request for an Early Cancellation
Borrowers with a good payment history can request an early cancellation when their mortgage balance reaches 80 percent of the home’s original value. A good payment history means you have not made a payment later than 30 days in the last 12 months.
In addition, there is no payment later than 60 days due in the previous 24 months. Another condition is that your mortgage must be the home’s only debt.
This implies that there is no second mortgage on the property. An appraisal is needed to prove that the home’s value has not depreciated.
You can submit a written request to your mortgage servicer for an early cancellation once these conditions are met.
3. Refinance to Get Rid of PMI
Refinancing your mortgage is another option on how to get rid of PMI. Refinancing means getting a whole new loan to replace your current one.
There is a good chance that your home’s value has appreciated. If this is the case, getting a new loan may account for 80% of that value. It should be noted that refinancing only makes sense if the new loan would not require PMI and you are able to secure a lower interest rate.
4. Boost the Value of Your Home
You can also get rid of PMI by undertaking meaningful home renovations. Such renovations must be a well-chosen project that will boost the value of your home.
However, you must review the costs to see if you qualify for a written PMI cancellation request.
5. Order for a New Home Appraisal
You may request a new appraisal on your home if you notice that property values are on the rise in your area. You must be able to price that your home value has increased sufficiently to be able to get rid of PMI.
It should be noted that the lender must be notified to approve the appraiser. You may not be able to hire an appraiser of your choice.
6. FHA Loan PMI Removal
You are required to pay PMI if you put down less than 10 percent of the Federal Housing Administration (FHA) loan. The law requires the continuous payment of PMI for the entire duration of the loan.
However, you can get rid of PMI on an FHA loan by refinancing into a conventional loan if your LTV is at most 78 percent. These are mortgages that are not insured by government agencies. They are insured or guaranteed by private companies.
If you are worried about paying PMI for the entire duration of the FHA loan, it might be a good move to consider refinancing into a conventional loan if your LTV is at 78 percent or less.
How to Avoid PMI Entirely
For buyers who wish to avoid paying PMI, there are a few ways to go about it;
- Make a down-payment of 20 percent or more. PMI would not apply to a 20 percent equity in the property.
- Also, military personnel can apply for a VA loan. VA loans do not charge PMI regardless of your LTV. The VA loans are guaranteed by the U.S. Department of Veterans Affairs.
- You also have the option of Lender-Paid Mortgage Insurance (LPMI) where an understanding is reached and the lender bears the cost. You should speak to your lender about this.
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Mortgage Insurance can be very expensive hence, the need to avoid or get rid of it. It is important to understand the terms of your mortgage contract and be familiar with how to get rid of PMI to avoid paying it longer than necessary. If you cannot afford a 20 percent down-payment to avoid PMI entirely, there are other mortgage insurance that can help you out.
Alternatively, you can always request a copy of the loan’s PMI cancellation policies before you sign the mortgage agreement.