Follow these Steps to Get Rid of PMI – Private Mortgage Insurance

By
Martins Chima
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Many homeowners wants to know how to get rid of private mortgage insurance buy following the PMI cancellation Act especially if they have low income. To get rid of PMI, simply ask for PMI cancellation, wait for automatic termination, increase payments, refinance home, get property appraisal, renovate your home to increase its value.

If you put down a small amount, say less than 20% of the home’s price, when you bought your house, you’re likely familiar with PMI, which stands for private mortgage insurance. This extra cost can increase your monthly mortgage payment by a few hundred dollars, but it’s not a permanent thing.

Every year, your PMI is recalculated based on your current loan balance, so the payment amount goes down as you pay off the loan. Eventually, you can completely eliminate PMI.

Main Points in this PMI Guide

  • According to federal law, a lender must cancel private mortgage insurance on conventional loans once the borrower achieves 22 percent equity in the home.
  • There are alternative methods to eliminate PMI earlier than scheduled, such as obtaining an appraisal to determine the fair market value of your property.
  • Homeowners can also focus on paying down the principal faster, but it’s important to be careful and not strain your budget excessively just to remove PMI.
How to get rid of private mortgage insurance
How to get rid of private mortgage insurance

When does PMI go away from Mortgage Payment?

The Homeowners Protection Act of 1998 states that lenders must remove private mortgage insurance once a borrower’s loan-to-value ratio (LTV) reaches 78 percent. For instance, if your home was bought for $300,000, you would reach a 78 percent LTV ratio when your remaining mortgage principal balance is $234,000.

Helpful Guides while planning to remove PMI:

How to get rid of PMI from my Mortgage Payment

If you’re fed up with PMI payments taking a chunk out of your monthly finances, there are six primary methods to eliminate PMI:

  1. Be patient and wait for automatic or final PMI termination.
  2. Ask for PMI cancellation once your mortgage balance hits 80 percent.
  3. Increase your mortgage payments to pay down the balance faster.
  4. Consider refinancing your mortgage and get rid of PMI.
  5. Get a new property appraisal to get rid of PMI.
  6. Enhance or renovate your home to boost its value.

1 . Be patient and wait for automatic or final PMI termination

Simply wait until you qualify for automatic or final termination of PMI. Trust me, this option is the choice: just wait until your lender takes care of it. An informal federal housing regulation often referred to as the “PMI Cancellation Act” — officially named the Homeowners Protection Act of 1998 — is designed to help homeowners eliminate their PMI. This act specifies that your mortgage lender or servicer must automatically end PMI when your Loan-to-Value (LTV) ratio decreases to 78 percent. This occurs when your mortgage balance reaches 78 percent of your home’s purchase price.

Alternatively, the servicer must cancel the PMI when you pay half of your loan’s amortization schedule. For example, if you have a 30-year mortgage, the midpoint would be after 15 years. If it’s a 15-year loan, the midpoint is 7.5 years. Even if your mortgage balance hasn’t yet reached 78 percent of your home’s original value, the PMI payments must stop. This is referred to as final termination.

Who is affected: This method of removing PMI is suitable for people with conventional loan / mortgages who have been making payments as per their original schedules and have achieved either 22 percent equity or reached the halfway point in terms of time. The loan must be current in both cases, and the borrower should have a good standing — no late payments, skipped payments, or insufficient payments.

2. Ask for PMI cancellation once your mortgage balance hits 80 percent.

You can request PMI cancellation when mortgage balance reaches 80%. This is another way the PMI Cancellation Act benefits you. It give you the option to remove PMI once you have achieved 20 percent equity in your home. This occurs when your loan balance reaches 80% of the original value of your home. So, you essentially get a 2% advantage here, which can lead to significant savings. To illustrate, let’s say you have a $600,000 home. With 20 percent equity, you can request PMI removal when your outstanding balance is $480,000 — which is $12,000 less than the 78 percent equity threshold.

Who is impacted: If you’re consistently making payments according to the schedule, you can locate the date when you’ll reach 80 percent on your PMI disclosure form (or obtain this information from your servicer). However, it’s important to be proactive and initiate the process yourself.

To cancel PMI (Private Mortgage Insurance), you need to take the following steps:

  1. Write a written request for PMI cancellation and send it to your lender or servicer.
  2. Ensure you are up-to-date on your mortgage payments and have a positive payment history.
  3. Fulfill any additional lender conditions, like not having any other liens on your home (such as a second mortgage).
  4. Depending on the situation, you might need to obtain a home appraisal. If the value of your home has decreased, you might not have achieved the 20 percent equity required to cancel PMI.

3. Increase your mortgage payments to pay down the balance faster

Pay down your mortgage earlier. If you have some extra money available, consider using it to make larger or additional mortgage payments. This can help you reach the 20 percent equity mark more quickly.

By paying off some of the principal amount on your loan ahead of schedule, you’ll lower the overall balance. This not only brings you closer to canceling PMI but also reduces the interest you’ll pay over the life of the loan. Even a modest extra payment of $50 per month can make a significant difference in both your loan balance and the total interest paid.

To estimate the mortgage point at which your mortgage balance will hit the 20% equity threshold for PMI cancellation, multiply the original purchase price of your home by 0.80.

Who this affects: This approach is beneficial for homeowners who have extra funds available and want to achieve 20% equity sooner. You can achieve this by making larger, more frequent payments or by making a huge payment towards the loan. It’s a good idea to check with your lender to understand their preferred methods for achieving early equity and PMI cancellation.

4. Consider Refinancing Your Mortgage

Refinance your mortgage. When mortgage interest rates are low, homeowners might think about refinancing their mortgage. In recent years, when rates were as low as 3%, refinancing offered the benefits of lower monthly payments and reduced overall interest costs. The increase in home values often meant that the new loan amount would be below 80% of the home’s value, allowing homeowners to get rid of PMI.

However, with the recent significant rise in interest rates, refinancing solely to cancel PMI may not be as worthwhile due to the associated expenses and efforts. Still, it’s something to consider if you’re close to reaching the 20% equity threshold. Alternatively, paying for a new home appraisal might be a more cost-effective option.

Another approach is refinancing into a loan that doesn’t require PMI. One way to do this is by “piggybacking” – taking out a secondary loan, like a home equity loan or line of credit, in addition to your primary mortgage. This extra loan can help you reach the 20% down payment mark.

You could also explore refinancing with a government-backed, USDA or VA loan, both of which do not include PMI, although they have their own fees and eligibility criteria.

Example of How Beneficial refinancing helps to Get Rid of PMI

Refinancing makes the most sense if your home’s value has significantly increased since your last mortgage. For example, if you purchased your home four years ago with a 10% down payment and its value has gone up by 25%, you might now owe only 65% of its current value – below the 80% PMI threshold. In such cases, refinancing could eliminate your need to pay for PMI.

When considering refinancing, make sure to compare the closing costs and new interest rate against potential savings from the new loan terms, especially given the current higher borrowing costs, as well as the benefit of eliminating PMI.

Who this affects: It’s important to note that this strategy might not be suitable for many people right now. The Data from Redfin suggests that over 90% of homeowners with mortgages have rates lower than 6%, meaning they’ve secured a better deal than what’s available in the current higher-rate environment.

5. Get a new property appraisal to Get Rid of PMI.

You can reappraise your home. In a competitive real estate market, the value of your home might increase significantly, causing your home equity to reach 20% earlier than expected. In such cases, it could be worthwhile to pay for a new home appraisal. If you’ve owned the home for at least five years and your loan balance is no more than 80% of the new appraised value, you can request the cancellation of PMI. If you’ve owned the home for at least two years, your remaining mortgage balance must be no greater than 75% of the new value.

The cost of a professional appraisal for a single-family home has gone up in recent years. As of early 2023, the price typically falls between $500 and $700, varying based on your location. Some lenders might also accept a broker price opinion, which is a more budget-friendly option compared to a full appraisal. However, professional appraisals adhere to strict regulations and provide an impartial evaluation. Regardless of the approach, spending a few hundred dollars now could save you much more in potential PMI payments down the line.

Who this affects: This strategy can benefit homeowners in areas where median home values have rises up to 30% or more over the last few years. If your home’s value has significantly increased, it might push your home equity above the 20% threshold, making you eligible to request PMI cancellation. If you find yourself in this situation, it’s a good idea to discuss the possibility of a new appraisal with your lender to potentially remove the PMI requirement.

6. Enhance or renovate your home to boost its value.

This is the time to expand or renovate your home to increase its value. Normally, it won’t be financially wise to make home improvements solely to remove PMI, investing in your home can potentially lead to PMI removal. Home enhancements or upgrades you make to your home could contribute to a higher value, resulting in increased equity. For example, renovations like a modernized kitchen, new windows or garage doors, or an additional bathroom can boost your home’s value, which would be reflected in a new appraisal. This increased value might help you reach the 20% equity mark required for PMI cancellation.

This strategy could be beneficial for homeowners who are nearing the 20 percent equity threshold and becoming eligible for PMI cancellation. If you’ve made substantial improvements to your home, having it reappraised after the work is done might push its value high enough to meet the necessary threshold for PMI removal.

Do you have PMI rights under Federal Law?

Yes! If you’re paying for PMI, it’s important to know your rights under the Homeowners Protection Act. This act not only sets the guidelines for when you can remove PMI but also safeguards you from being charged too much for it. The good news is that you have the right to get rid of PMI once you’ve built up enough ownership in your home.

Different lenders have different rules about removing PMI, but they are obligated by law to provide a way for you to do so. Before this law, homeowners had limited options if their lender didn’t want to stop PMI payments, even if they had enough ownership in their home to cover the lender’s risk in case of default.

Before you agree to a mortgage with PMI, make sure you understand the rules and timeline for getting rid of PMI. This way, you can keep track of your progress towards stopping those payments. If you think your lender is not following the rules for ending PMI, you can report the issue to the Consumer Financial Protection Bureau.

Remember: You might be able to stop paying PMI if your home’s value increases or if you refinance your mortgage with at least 20 percent ownership. However, it’s your responsibility to request it.

My Advise: Don’t drain your bank accounts to remove PMI (Private Mortgage Insurance)

When you’re trying to get rid of PMI, it’s important not to rush into things. While paying PMI might not be the most enjoyable part of your finances, it’s crucial not to make hasty decisions that could worsen your financial situation.

Many financial experts suggest having some money set aside for emergencies, which is a wise move. Before you start using your savings or retirement funds to reach that 20 percent equity goal, it’s a good idea to talk to a financial adviser to make sure you’re making the right choices. Especially if you recently bought or refinanced your home and have a favorable interest rate, it might not be a smart move to take money out of investments that are growing or earning high returns just to pay off a low-cost mortgage and get rid of PMI.

Greg McBride, who is a chief financial analyst at Bankrate, points out that some buyers have an unnecessary aversion to PMI. He explains that if you’re not using an FHA loan, you’re not stuck with PMI forever. You can remove it once you reach a 20% equity level, which might be only a few years away depending on how your home’s value appreciates. However, he advises against using up all your cash for a down payment just to avoid PMI. It’s important to leave yourself with some financial flexibility for the future.

FAQs about Private Mortgage Insurance (PMI)

How much does PMI cost so I can Get Rid of PMI?

On average, the cost of PMI usually falls within the range of $30 to $70 per month for every $100,000 you borrow, as stated by Freddie Mac. For instance, if you have a mortgage of $400,000, your monthly PMI payment could be anywhere from $120 to $280.

What are the Benefits of using PMI instead of to Get Rid of PMI?

The key advantage of having PMI is that it allows you to make a smaller initial payment when buying a home. In areas with high home prices, this enables you to become a homeowner sooner, rather than waiting until you can gather a 20 percent down payment.

Can PMI be removed if the value of your home increases?

Yes, it can. If the value of your home goes up, whether due to market trends or your own investments in property upgrades, you could have the opportunity to ask for PMI to be removed. This might involve getting a home appraisal to confirm the higher market value, and while there’s a cost to the appraisal, it could be a wise investment to stop making additional PMI payments.

Helpful Mortgage Guide and Overview:

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