. . . and why PMI in the first place? PMI or Private Mortgage Insurance, is the lender’s protection in case you default on your mortgage and your home goes into foreclosure.
Homebuyers unable to come up with a 20% down payment typically are considered to be at a higher risk of default than buyers with 20% or more to put down on a home – and lenders require them to purchase PMI as part of the home sale.
And homeowners who refinanced their home with less than 20% equity were likely required to purchase PMI as well.
Typically, PMI is rolled into a homeowner’s mortgage. The lender must terminate PMI when the homeowner has 22% equity in the home. Although the lender is required to stop charging you PMI once your loan balance is below 78% of the original value of the home, you may be able to have your PMI eliminated by acting proactively.
In the thrill of purchasing your home, you probably didn’t mind paying for PMI – because without it you wouldn’t have been able to buy your home. But over time you’ll start to notice that PMI is expensive! And who wants to pay money they don’t have to? Especially because the money you pay for PMI doesn’t benefit you at all – it’s a benefit only to the mortgage lender.
If you’re not sure what PMI could be costing you take a look at this information from Nerdwallet.
GUIDELINES FOR REMOVING PMI
The guidelines for removing PMI vary depending on whether you have a conventional or FHA loan. Let’s take a look at your options:
Conventional loans
- Cancellation using current value. Homeowner must have 20% equity in their home, have been in the home at least five years, and have no delinquent mortgage payments. If the homeowner has been in the home for two to five years, 25% equity is required. PMI cannot be removed if a homeowner has been in the home less than two years. Equity must be proven with an appraisal.
- Cancellation using original value. When paying the mortgage down to 80% of the original purchase price (or when the loan amortizes to 80%), the homeowner can request removal of PMI.
- Automatic cancellation. Once the loan amortizes to 78%, PMI is automatically removed.
FHA loans
- If the original loan closed prior to 06.03.13. The mortgage insurance cancels once the loan reaches 78% of the original value and mortgage insurance has been paid for a minimum of 60 months (five years). This typically happens in year 11 unless additional principal payments have been made.
- If the original loan closed on or after 06.03.13. If the down payment was 10% or more, PMI can be removed after 11 years. If the down payment was less than 10%, PMI must be paid over the entire term of the mortgage.
BUILDING EQUITY IN YOUR HOME TO SUPPORT CANCELLATION USING CURRENT VALUE
Many homeowners don’t realize that they can eliminate PMI from their monthly mortgage. It’s not difficult to do, but there is a definite process you must follow.
The most important thing to remember is that you need 22% equity in your home.
So, how can that happen?
- Appreciation. Over time, the value of your home will likely appreciate as home values rise. If you are seeing rapid rises in the value of homes in your area, talk to your lender about getting the home re-appraised. Your real estate agent should also be able to give you a sense of home values in your area; talk to him or her first to see if it makes sense to invest in the cost of an appraisal.
- Refinancing. Sometimes refinancing and restructuring your loan can allow you to eliminate PMI. Often this involves paying a slightly higher rate but configuring the loan so that there’s no PMI. Although most buyers initially balk at the thought of a higher rate, running the numbers often shows savings over the long run (even at the higher rate). Sometimes refinancing in concert with time (and an appraisal showing higher value) will also do the trick.
- Improvements. Not every remodeling project will dramatically increase the value of your home. Be judicious in your improvements, and check with your real estate agent to see which improvements return the biggest bang for your buck.
- Make bigger payments. The more quickly you can reduce your loan balance, the more quickly you can eliminate PMI. Even an extra $100 per month toward the principal balance of your mortgage can help build equity.
ENDING PMI ON YOUR CONVENTIONAL LOAN ONCE YOUR EQUITY IS AT 80%
If you have hit the 80% equity plateau – congratulations!
Contact your lender and request that the PMI is dropped (Note: your lender will not consider your request if you have a less than stellar payment history on your mortgage).
There’s typically an application you need to complete, and you will likely be asked to provide documentation.
ENDING PMI ON YOUR CONVENTIONAL LOAN ONCE YOUR EQUITY IS AT 78%
Once your home is at 78% equity, your lender is required to automatically terminate your PMI. No request is required from you.
But the tricky thing about the 78% equity is that it must have been made through regular payments. The lender doesn’t go back and factor in any extra payments you made. So, if you made extra payments, you’ll still need to prepare a written request to have PMI removed.
