Private mortgage insurance is generally required by lenders when the borrower has less than 20 percent of the purchase price paid.
The lender is protected if you fail to make payments. Private mortgage insurance (PMI) costs vary according to your circumstances, but in general, you should expect to pay $30-$70 per $100,000 of borrowed money.
You can save hundreds, or thousands of dollars per year by figuring out how you can get rid of PMI. You can remove PMI by following these steps.
Is it possible to remove PMI early?
If you do not have 20% in downpayment, PMI may feel like a punishment. However, there are several options to remove it. You can cancel PMI under the federal Homeowners Protection Act by either requesting it or waiting until termination is automatic.
If you haven’t already had PMI removed by the loan servicer, it must be terminated when you are halfway through your repayment. At the 15th anniversary of a 30 year loan, for example.
There are 4 ways to eliminate PMI.
1. PMI will end when it ends automatically
The federal law mandates that loan servicers terminate PMI when your loan balance reaches 78% of its original value — which means you will have equity of 22% in your house.
PMI is canceled if you are not up to date with your payments. It will happen on the 1st of the month following the one in which you have caught up.
2. Request PMI cancellation
You don’t need to wait for the threshold of 78% before you can automatically remove the mortgage principal.
The federal law permits you to make a request in writing for the removal of PMI when your principal loan balance reaches 80%.
You can also cancel PMI if you are current with your mortgage payment and have a solid history of payments. Your lender may also ask that you prove you do not have a secondary mortgage, such as home equity loans or home equity lines of credit. You may also have to pay a fee for an appraisal of your home to prove that its value is not below the original.
3. Get rid of PMI with refinance
The benefits of refinancing your mortgage are many, and one is the elimination of PMI. The new lender may require you to submit an appraisal when refinancing a mortgage. You can avoid PMI on your refinance if the amount of the loan is less than 80% of the appraised value.
Refinancing can result in a number of closing fees and other costs. If interest rates are lower than when you first took out your mortgage, refinancing is advisable.
4. Get a new appraisal
You may have equity in excess of 20% if home values are up or if you have made many improvements. If the new appraised value and the loan-tovalue ratio meet the requirements of the lender, then you might be eligible to have the PMI removed. You should check with your lender about its policy on this.
Is PMI removed when my house value rises?
Home values typically increase over time. If you improve the home, its value will increase even more. If you can meet the requirements of your lender, you may be able to get rid of PMI by getting a fresh appraisal.
The Homeowners Protection Act does not require you to hold on to your loan for any specific period of time in order to request PMI cancellation. It is the same when you are looking at eligibility to automatically terminate PMI, also known as seasoning requirements.
Is removing PMI worth it?
It can often be worthwhile to get rid of PMI because you will save money each month. It’s still important to consider potential costs depending on the situation.
Closing costs for refinancing can be anywhere from 2 to 6 percent of your loan. Refinancing can save you money, including PMI. If you sell your home before these costs are recovered, then it may be worthwhile.
HomeAdvisor says that an appraisal can cost anywhere between $313 to $422 per single-family house.
This upfront cost may be worthwhile if you qualify for PMI cancellation. If the value of your home is lower than the appraised price, the cost for the appraisal will be wasted.
What’s next?
Consider your circumstances and the best removal method for you if you think you are eligible for PMI cancellation. Divide your current mortgage balance by your original home value to calculate your LTV.
Review your loan documents, or call your lender for the amortization schedule to see how close you come to the threshold.
Use an online property valuer like Redfin and Zillow to estimate the worth of your house. You can save money by refinancing if you are confident an appraisal will help you reach your goals.
If you are also considering refinancing to reap other benefits from your mortgage, then getting rid of PMI could be just the cherry on top.