Private Mortgage Insurance or PMI is a type of insurance that lenders require when homebuyers put down less than 20% of the home’s purchase price. While PMI provides protection for the mortgage lender in case of default, it can be an additional financial burden for the homeowner. Fortunately, there are ways to remove PMI and reduce your monthly mortgage payments. In this comprehensive guide, Smart Lending will explore the various methods to remove private mortgage insurance and eliminate PMI, the eligibility requirements, and the steps involved in each process.
Understanding How to Eliminate Private Mortgage Insurance
PMI is designed to protect lenders from potential losses if a borrower defaults on their mortgage. It is usually required for conventional loans when the down payment is less than 20%. PMI can cost between 0.3% to 1.5% of the original loan amount per year, depending on the loan-to-value (LTV) ratio and the borrower’s credit score. This insurance is typically added to your monthly mortgage payment.
Methods to Remove PMI
- Automatic Termination
The Homeowners Protection Act of 1998 mandates that lenders automatically terminate PMI when the mortgage balance reaches 78% of the original purchase price or the home’s appraised value at the time of purchase, provided the borrower is current on payments. This means that once you have paid down your mortgage to 78% of the home’s original value, your lender is required to get rid of PMI mortgage insurance without any action needed from you.
- Requesting Cancellation
Borrowers can request PMI cancellation once their mortgage balance reaches 80% of the original purchase price or appraised value. To initiate this process, you must:
- Be current on your mortgage payments.
- Have a good payment history.
- Ensure that your property does not have any second liens (e.g., a second mortgage or home equity line of credit).
- Provide a written request to your lender for PMI cancellation.
Lenders may require a new appraisal to confirm that the home’s value has not decreased since the original purchase.
- Refinancing
Refinancing your mortgage is another effective way to remove PMI, especially if your home has appreciated in value. By refinancing, you can obtain a new loan that does not require PMI if your new loan amount is 80% or less of the current appraised value of your home. Here’s how to go about it:
- Evaluate Your Financial Situation: Ensure that refinancing will result in overall savings despite the closing costs associated with obtaining a new loan.
- Get a New Appraisal: A new appraisal will determine the current market value of your home. If the appraisal shows that you have at least 20% equity, you can refinance into a new loan without PMI.
- Shop for Mortgage Lenders: Compare offers from different lenders to find the best terms and interest rates for your new mortgage.
- Complete the Refinancing Process: Submit your application and required documentation to your chosen lender, and close on the new loan.
- Increasing Your Home’s Value
Another strategy to remove PMI is to increase your home’s value through home improvements or market appreciation. If your home’s value rises significantly, your loan-to-value ratio may drop below 80%, allowing you to cancel PMI. Follow these steps:
- Invest in Home Improvements: Renovations such as kitchen upgrades, bathroom remodels, or adding living space can increase your home’s value.
- Monitor the Real Estate Market: Stay informed about local market conditions. Rising home prices can naturally increase your home’s value.
- Request a New Appraisal: Once you believe your home’s value has increased sufficiently, request a new appraisal. If the appraisal shows that you have 20% equity or more, contact your lender to cancel PMI.
- Paying Down Your Mortgage Faster
Accelerating your mortgage payments can help you reach the 80% LTV ratio faster, enabling you to request PMI cancellation. Here are some strategies to pay down your mortgage more quickly:
- Make Biweekly Payments: Instead of making monthly payments, switch to biweekly payments. This results in one extra payment per year, reducing your principal balance faster.
- Make Extra Payments: Allocate any additional funds (such as bonuses or tax refunds) towards your mortgage principal.
- Round Up Your Payments: Round up your monthly payment to the nearest hundred dollars to make a small but consistent impact on your principal balance.
- Recasting Your Mortgage
Mortgage recasting, also known as re-amortization, involves making a large lump-sum payment towards your mortgage principal and having your lender recalculate your monthly payments based on the new, lower balance. Not all lenders offer recasting, but it can be an effective way to remove PMI if your loan balance drops below 80% of your home’s value. To recast your mortgage:
- Check with Your Lender: Confirm that your lender offers recasting and understand any fees involved.
- Make a Lump-Sum Payment: Make a substantial payment towards your principal to reduce the loan balance.
- Request Recasting: Ask your lender to recast your mortgage. Your monthly payments will be recalculated based on the new balance, potentially allowing for PMI cancellation if the LTV ratio is below 80%.
Eligibility Requirements for PMI Removal
To successfully remove PMI, you must meet certain eligibility criteria, which can vary depending on your lender and the method of removal. Common requirements include:
- Good Payment History: Ensure that you have made timely mortgage payments, with no late payments in the past year.
- Sufficient Equity: You must have at least 20% equity in your home, as determined by your loan balance and current home value.
- No Second Mortgages : Your property should not have any home equity loans, such as a second mortgage or home equity line of credit.
- Written Request: Submit a written request for PMI cancellation if applicable.
Steps to Remove PMI
- Review Your Mortgage Documents: Understand the terms of your mortgage and the requirements for PMI cancellation.
- Monitor Your Loan Balance: Keep track of your mortgage balance and compare it to the original purchase price or appraised value.
- Obtain an Appraisal: If needed, get a new appraisal to determine your home’s current value.
- Submit a Written Request: If you meet the eligibility criteria, submit a written request for PMI cancellation to your lender.
- Follow Up: Stay in communication with your lender to ensure that your PMI cancellation request is processed promptly.
What Is PMI?
Before diving into the methods of removing PMI, it’s essential to understand what PMI is and why it exists. PMI, or Private Mortgage Insurance, is a type of insurance required for some conventional loan borrowers. If your mortgage includes PMI, you’ll pay it as part of your monthly mortgage payment. PMI provides protection to the mortgage lender in case of borrower default or foreclosure.
Bankers and mortgage lenders typically require PMI when the borrower’s down payment is less than 20% of the home’s purchase price. A higher loan amount with a smaller down payment poses a greater risk to lenders and mortgage investors. PMI mitigates this risk, making it easier for borrowers to qualify for a mortgage even if they can’t afford a large down payment.
Summary on How to Remove Private Mortgage Insurance
Learn how to get rid of PMI and enjoy the significant savings on your monthly mortgage payments and overall loan costs. By understanding the various methods to eliminate PMI. such as automatic termination, requesting cancellation, refinancing, increasing your home’s value, paying down your mortgage faster, and recasting your mortgage you can take proactive steps to achieve this financial milestone.
Always review your mortgage documents and consult with your lender to understand the specific requirements and options available to you. With careful planning and diligence, you can successfully remove PMI and enjoy the benefits of reduced housing expenses. Take a few minutes and let Smart Lending help you find the best lenders that have viable solutions to remove PMI.
