When you first take out your loan, you may find that you have to pay PMI or Private Mortgage Insurance. This is something that can add hundreds of dollars to your monthly mortgage payment. In this blog post, I’m going to go over how to get rid of PMI.
Many homeowners want to find ways to get rid of it, as it’s essentially money that isn’t servicing you. Are there ways to get rid of PMI and save that money?
Luckily, there are several ways you can ditch PMI for good on your mortgage. Here are some ways you can get rid of it and make that money work for you.
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5 ways to get rid of PMI
It really is possible to get rid of the PMI on your mortgage payments. There are a variety of ways you can remove those payments and start saving that cash.
Here are a few different ways you can do this. Remember, every situation is different, so you’ll need to find the method that’s right for you.
1. Pay down the mortgage to get rid of PMI
This is probably the simplest way to pay down that PMI and start making real headway on your mortgage. If you want to do this, you’ll need to make some calculations.
Essentially, you want to pay your mortgage down to 80%. For example, say you paid $250,000 for your home when you first took the loan out.
When you reduce it down to 80%, you’ll have $200,000. You want to pay down your loan by $50,000 to have the PMI removed.
This is one of the easiest ways to get rid of PMI, as all you need to do to qualify is keep paying your loan off. If you’re already keeping up to date with the payments, that shouldn’t be a problem.
Requirements to get rid of PMI
Once you’ve met that requirement, you’ll need to apply in writing to have the PMI removed. Your lender will have some other requirements, such as:
- You must have a good payment history, and you must be current on your payments.
- Also, you’ll need to certify that there are no junior liens on the property, such as a second mortgage.
- Finally, you’ll need to provide evidence that the home’s value has not declined since you took out the mortgage. If it has decreased, you may not be able to cancel the PMI.
That last point is why it’s important to check home prices in your area before you go ahead and request that your PMI is canceled. If there has been a downturn, your lender may require you to have a home appraisal.
This will ensure that your home’s value is correct and that you have paid off 20% of the home’s value. It’s a good idea to agree to this if you believe that your home is still at a similar value as when you bought it.
If you reach these requirements, the PMI will be canceled, and you’ll see the difference in your monthly payments.
2. Get your mortgage down to the automatic cancelation price
You can wait until you’re at 80% of your mortgage to cancel the PMI, but if you’re still paying it after then, you can actually see it canceled automatically.
This is thanks to the Homeowners Protection Act. There’s a default setting where PMI must be canceled by the lender themselves, and it pays to be aware of this.
Once the outstanding balance of your mortgage drops to 78%, the lender must cancel the PMI on your payments. So, if the original value of your home was $200,000, they must cancel the PMI once you reach $156,000 outstanding on the loan.
This should happen without you having to lift a finger at all. You just need to keep making those payments, and it will be canceled once you hit that 78%.
You do need to ensure that you stay current on your payments, however. If you’re not, you won’t be eligible for that cancelation.
Keep an eye on your payments as you near that 78& mark, and make sure that the PMI is taken off your future payments.
3. Pay down the mortgage to the midpoint of the term
This is another automatic way to have the PMI on your mortgage payments canceled. When at least half of the mortgage term has elapsed, the lender is obliged to remove the PMI on your payments.
This should happen, even if you haven’t managed to pay it down to 78% of the outstanding balance. For example, if you have a 30-year term on your loan, the PMI must be removed at the 15-year mark.
Usually, you won’t get to this point before finally being rid of PMI. On most regular loans, you’ll have paid down to more than that 78% mark on your loan.
However, there are some alternative mortgages, such as balloon mortgages or interest-only loans, where you may not reach that 78% in that time. In these instances, the lender is still required to remove the PMI at the midpoint of the term.
Again, you need to be current on your payments for the PMI to be removed. If you’re staying up to date, then it shouldn’t be a problem.
4. Refinance your mortgage to get rid of PMI
Are you considering refinancing your home to take advantage of a lower interest rate? Then you may be able to get rid of your PMI at the same time.
You can usually get rid of the PMI on your mortgage if the new mortgage is 80% or less of the home’s current value.
In cases like these, getting rid of your PMI is essentially a bonus when you’re looking to get a better interest rate. Remember, though; it’s only going to work in certain situations.
The new mortgage you get must be 80% of the home’s current value. Otherwise, you will still need to pay PMI on the new mortgage you get.
If you’re thinking of doing this, then refinancing your mortgage needs to make financial sense in the first place. If you’re not going to benefit otherwise, it’s not worth refinancing just to get rid of PMI.
Remember, you’re going to see the PMI be removed automatically as soon as you hit 80% left on the outstanding balance.
If you have a government-backed loan though, refinancing will be the only way you have to get rid of that PMI. Refinancing allows you to change from a government-backed loan to a conventional loan.
Once you have a conventional loan, you’ll be able to remove that PMI and reduce your payments. This is a good option if you’re in a better financial situation than you were when you initially took the loan out.
5. Prove the value of your home has risen
There’s one more way you can get rid of the PMI on your mortgage payments, and that’s to show that the value of your home has risen since you bought it. If you can do this and show that your outstanding balance is 80% or less of the value, then the PMI can be taken off.
In many cases, this can happen because property values in the area have risen rather than because you’ve been paying the mortgage down.
If you think you can do this, then you’re going to need to do some leg work. Start researching the value of homes in your area, and speak to a realtor if you can, as well as looking up homes online.
Has the value of homes risen in your area? Then it’s time to talk to your lender about removing the PMI.
You’ll need to ask them to send you the paperwork to have the PMI removed. Fill this out, and send it back to your lender to get the process moving.
Do be aware that you won’t be able to have the PMI adjusted until you’ve had at least two years’ worth of on-time payments. If you haven’t managed this, then you’ll need to wait until you have this on your record.
At this point, they are very likely to send someone out to appraise your home. Remember that this will cost you a few hundred dollars, so you’ll need to be pretty confident in your assessment before paying.
If you can prove that property values have risen and that you have made the requirements, you should then be able to remove the PMI from your mortgage payments.
PMI Facts Every Homeowner Should Know
What Is PMI?
Firstly, you need to understand what PMI is. What is it, and how does it affect your loan repayments?
PMI stands for Private Mortgage Insurance and is applied to most loans that cover more than 80% of the home’s value. It’s designed to protect the lender in case you default on the loan.
PMI won’t cover the whole cost of the mortgage, as the sale of a home will cover the rest of the losses should you go into foreclosure. PMI ensures that the lender can recoup their losses if needs be.
The cost of PMI is applied to your monthly repayments. Because of this, you will be paying more on your monthly installments than those that put down a 20% deposit or more.
How Much Does PMI Cost?
PMI is considered to be expensive, should you need it. For example, if you’ve got a $190,000 mortgage with a home value of $200,000, you can expect to pay $138 per month in insurance.
That adds up to $1,656 a year, which of course, makes the mortgage more costly. In the beginning, it may be worth it to you as you want to get a foot on the property ladder.
Over time though, that’s going to get expensive.
Know Your Rights Around PMI
If you’re looking into removing the PMI on your payments, then you’ll want to know your rights around the subject. This helps you be well informed when you come to talk to your lender.
It helps if you were clear on the PMI on your mortgage when you signed on. If you’re about to close on a new mortgage, make sure you ask about the PMI and when you can expect it to be canceled.
Remember that you are protected under the Homeowners Protection Act. This helped bring the PMI Cancellation Act into law, and you’re entitled to have PMI canceled if you reach the milestones noted above.
Remember that lenders will have different rules around how PMI is canceled, but they have to let you cancel it.
If you’re finding it difficult to get your PMI canceled, even if you meet the requirements, then you have options. You can forward your complaint to the Consumer Financial Protection Bureau.
This organization is designed to protect your rights when it comes to your money. They will talk to your lender and work to the situation straightened out.
Take Care Of Your Finances
It’s important to be able to cancel PMI as soon as possible, but take care as you look into this. It’s easy to rush into the process, even if it costs you more in the long run.
Many will feel it’s worth dropping more on the mortgage now in order to avoid paying PMI down the road. In theory, that does make sense, but it’s not always the answer.
It’s always smart to have some financial liquidity. That way, if you ever run into an emergency, you’ll have some cash saved up ready for it.
If you’ve spent everything you have avoiding PMI, then you’re not going to have anything left over. If you do run into an emergency, then you’ll be out of luck.
It pays to talk to a financial planner when you’re thinking of getting rid of the PMI on your loan. They will be able to help you make a plan and see if it’s feasible.
Remember, you’re not stuck with PMI forever. If you want to get rid of it quickly though, these methods will help you get rid of it sooner rather than later.
