Eliminating Your PMI Insurance
Understanding PMI Insurance
What is PMI?
Private Mortgage Insurance (PMI) is a type of insurance that protects the lender if a borrower defaults on their mortgage. It is typically required for home-buyers who put down less than 20% of the purchase price. This insurance ensures there is enough equity in the home for the lender to recoup their investment if they need to sell the property due to default.
PMI can be paid in various ways: as a monthly premium added to your mortgage payment, a one-time upfront premium at closing, or a combination of both. PMI’s cost and payment structure can be negotiated with your lender, and it’s important to compare these costs with other loan terms and programs to find the best financial fit for you.
Getting Rid of PMI
Automatic Removal at 78% LTV
Under the Homeowners Protection Act (HPA), lenders are required to automatically remove PMI when your loan-to-value (LTV) ratio reaches 78% of the original purchase price. This provision protects homeowners from paying for unnecessary insurance once they’ve built sufficient equity in their homes. Additionally, PMI must be removed at the halfway point of your loan term if your LTV hasn’t yet reached 78%, ensuring that borrowers are not indefinitely burdened by PMI.
Requesting PMI Removal at 20% Equity. Another method to eliminate PMI is to request its removal once you have 20% equity in your home, as stipulated by the HPA. This requires a written request to your lender, a current mortgage payment history, no other liens on the property, and possibly an appraisal to confirm sufficient equity. Meeting these criteria allows you to formally request the cancellation of PMI, ensuring you’re not paying for coverage you no longer need.
Example:
Consider a $300,000 home purchase with a 10% down payment ($30,000), leaving a mortgage balance of $270,000. With PMI typically costing between 0.3% and 1.5% of the original loan amount per year, let’s assume a 1% PMI rate. This means an annual PMI cost of $2,700, or $225 per month.
If you wait for automatic removal at 78% LTV, you could be paying PMI for several years, depending on your loan term and repayment schedule. However, if you request PMI removal at 20% equity, you could save thousands. For example, if you reach 20% equity in five years instead of the typical 11 years it might take to reach 78% LTV, you save six years’ worth of PMI payments.
That’s $2,700 per year for six years, totaling $16,200 in savings.
Paying Down Your Mortgage Early
You can also eliminate PMI by paying down your mortgage ahead of schedule. To estimate the mortgage balance needed for PMI cancellation, multiply the original purchase price by 0.80. If you can afford to make extra payments or a lump sum, this strategy can help you reach the 20% equity mark faster. Always check with your lender to ensure you’re following the correct process.
Example:
Let’s say you have a $300,000 home with a current mortgage balance of $270,000 and are paying $225 per month for PMI. If you pay an additional $200 per month towards your mortgage principal, you could reach 20% equity faster. Over two years, this extra payment totals $4,800, but you save $225 per month in PMI costs once you cancel it. This results in saving $2,700 annually in PMI, and over six years, that’s $16,200 saved, plus you’ll pay less interest over the life of the loan due to the increased principal payments.
Refinancing Your Mortgage
Refinancing is another option to get rid of PMI. You can “piggyback” by refinancing into a new loan that doesn’t require PMI because you’ll use a HELOC or another secondary mortgage to reach the 20% down payment threshold. Alternatively, you might qualify for a VA or USDA loan that doesn’t require PMI. Be sure to weigh the costs of refinancing against the benefits, as refinancing at a higher interest rate might not be beneficial.
Reappraising Your Home
In a hot real estate market, your home’s value may have increased significantly, giving you more equity. If you believe your home’s value has gone up, you can get an appraisal to determine if you have reached the 20% equity mark. Consult with a knowledgeable real estate agent to understand market trends and decide if paying for a new appraisal is worth it. If you plan to renovate your home, this can also boost its value, helping you eliminate PMI.
Conclusion
Eliminating PMI can lead to significant savings over the life of your mortgage. Whether you reach the automatic removal threshold, request removal at 20% equity, pay down your mortgage early, refinance, or reappraise your home, understanding your options is crucial. For personalized advice or assistance navigating PMI, feel free to reach out. I’m here to help you make the best financial decisions for your future.
📞 Contact me today for any questions regarding PMI or referrals to trusted professionals like appraisers and lenders who can help you through this process.
