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If you pay for private mortgage insurance (PMI) you’re not alone. The average down payment on a home purchase is only 6% requiring most homeowners to pay for PMI each month.
If you had less than a 20 percent down payment when you bought your house, your lender probably required you to have private mortgage insurance. Private mortgage insurance (PMI) protects your lender if you can’t make your mortgage payments.
PMI isn’t cheap either. While avoiding PMI in the first place saves you the most money, it’s not always possible. But if you already have it, there are ways you can get rid of PMI and save money each month.
Why You'd Want to Remove PMI*
- It’s expensive. PMI costs between 0.25 to 2.0 percent of the mortgage loan – on top of the principal and interest payment. For example, if you have a mortgage loan of $180,000, at a PMI rate of 1%, you’ll pay $150 each month, adding up to $1800 each year.
- You’re paying for insurance that protects your lender, not you. Your lender is the sole beneficiary of the private mortgage insurance.
- Monthly PMI premiums are not tax-deductible.
When Can You Get Rid of PMI?
You can get rid of PMI when you have 20% equity in your home. Equity is the difference between the value of your home and how much you owe. To cancel PMI, you have to get your loan balance to 80% or less of your home’s value.
To determine when you can cancel PMI, divide your current loan balance by the appraised value of your home (not the tax-assessed value).
For example, if you owe $160,000 on your home and its original appraised value was $200,000 (when you bought it), your loan balance is now 80% of your home’s value. ($160,000/$200,000 = .80). At this point, you can request the cancellation of your PMI (see below).
How to get rid of PMI
Wait Until it Gets Canceled by the Lender
Mortgage lenders are required to cancel your PMI when you’re loan amount gets to 78% of your home’s value. Your home’s value is based on the original appraisal done at the time you bought your home.
You have the option to wait until you have 22% equity in your home when the PMI gets canceled automatically.
At the time you take out your loan, your lender is required to tell you how long it will take for you to pay down your loan to the point where the PMI gets removed.
Ask Your Lender to Cancel It
If your mortgage balance has dropped to 80% of your home’s original appraised value, you can request the lender cancel your PMI. Some lenders will ask you to get a new appraisal of your home’s value when you make this request.
Get an Appraisal to Reflect a Rise in Home Value
If your home's value has increased and your mortgage balance is now 80% of your home’s value, some lenders will accept a new home appraisal to prove you now have 20% equity.
An appraisal costs anywhere from $400 to $600, so it’s important to check with your lender to see if this will be an acceptable way for you to remove your PMI.
To request a cancellation of PMI, you will need to:
- Request in writing the cancellation of your PMI
- Have a good payment history and be current on your loan
- Show that you don’t have any liens on your home (like a home equity loan)
- Get an appraisal, if your lender requires it
How You Can Speed up Removing PMI
Refinance your mortgage loan. If your home has increased in value enough to allow you to borrow 80% or less of your home’s current value, you can refinance without PMI on your new loan. Keep in mind you will pay for a new appraisal and closing costs with this approach.*
If you can lower your interest rate too, you’ll save even more. When you remove private mortgage insurance and decrease your interest rate, the appraisal fee and closing costs could pay off quickly.
Note that some mortgages have a waiting period of two years before you can refinance to get rid of PMI. If you haven’t held your mortgage for more than two years, check with your lender to see if this is an option for you.
Make extra principal payments. If your home hasn’t increased in value and refinancing won’t pay off, you could make extra principal payments to speed up the removal of your PMI. Even small amounts add up fast.
Increase the value of your home. If you remodel, add on, or make other improvements to your home or property, your home’s value can increase.
Though it’s not a good idea to make improvements for the sole purpose of removing PMI, if it’s something you are doing anyway, it will help you reduce the amount of time to being PMI-free.
*Not all loans allow you to get rid of PMI
With an FHA loan, you cannot cancel your mortgage insurance premium at any time, for any reason. To get rid of PMI on an FHA loan, you have to refinance to a conventional loan.
Removing Private Mortgage Insurance From Your Home Loan
If you’re currently paying for PMI, you know how it adds up. But there are several strategies for getting it canceled.
With a little time and effort, one of the above strategies will help you get rid of your PMI and put more money toward other savings goals each month!
Article written by Amanda