When you take out a conventional mortgage to buy a home, your lender will require you to pay a premium for a private mortgage insurance (PMI) coverage if you opt to put a low down payment. Like the majority of homebuyers, a PMI gets you an approved mortgage that you would barely qualify to take. After several years of repaying your monthly mortgage, you’ll realize that your PMI becomes a burden and canceling it could help increase your savings.
The average annual PMIs can go around 0.55 percent to 2.25 percent of the original loan amount depending on where you live. For example, if you bought a home with a listing price of $285,000 covered by a 2.25 percent PMI, you’re paying an extra whopping $6,412 each year or around $534 each month. For conventional mortgages, lenders will automatically cancel PMIs once home equity reaches more than 20 percent. Your lender should inform you on the closing table how long you’re going to pay your mortgage before canceling your PMI. If you don’t want to wait for that, there are several quick ways you can do to cancel your PMI:
- Refinance your mortgage – This is a popular and fastest way to get rid of PMI especially nowadays that interest rates have become more competitive. Refinancing could be your best option to remove your PMI if your home value has increased to the point that your current loan amount is less than 80 percent. For FHA loan borrowers, refinancing is the only way to repeal mortgage insurance premiums. Because refinancing replaces your existing loan with a new one with a much more favorable interest rate, it’s important that you review your credit and finances to figure out if it will help you achieve your financial goals.
- Get another home appraisal – Some lenders will consider removing your PMI if they determine that your home value has increased. Getting an appraisal is worth considering if you think your home value has improved. Some of the factors that affect your home’s value are current listing prices in your area, the home improvements you’ve made, and housing market conditions. The average cost of hiring a qualified appraiser could go around $336. If you want to know the approximate value of your home, consider checking previous and current listing prices of homes in your area or speak with a real estate agent. Some homeowners use Redfin Estimate to give them an idea of the worth of their homes.
- Make additional payments each month – Another way of getting rid of your PMI is to increase your monthly payments. Some homeowners consider this route if they are comfortable in making extra payments without sacrificing the comfort of their families. An additional $40 to $50 each month can help you build equity faster until you no longer need a PMI. In addition, paying one extra mortgage payment per year can cut the life of your loan in half. If you plan to make additional payments, discuss this with your servicer and put it in writing.
PMI protects the lender, not the borrower
There are conventional loans that allow you to put a down payment for as low 3 percent to buy a home. Lenders normally require a PMI for homebuyers who want to put a low down payment when buying a home. The insurance that you pay as a borrower protects the lender if, in an unfortunate situation, you can no longer repay your mortgage. In a conventional loan, a PMI stays in your monthly bill until you have enough home equity.
After meeting the lender’s requirements and building enough equity, some borrowers might still see a PMI in their monthly statements. The Homeowners Protection Act of 1999 or popularly known as the PMI Cancelation Act protects you from excessive PMI payments. If your lender refuses to cancel or continues to delay the cancelation of your PMI after having enough equity, consider filing a complaint with the Consumer Financial Protection Bureau.
PMI is the extra cost you pay to qualify to take out a conventional loan with a low down payment. Lenders require a PMI to reduce their risks when lending you money in case you default with your mortgage and face foreclosure. While your lender should cancel your PMI after reducing loan value to 78 percent, the tips mentioned above can help you remove your PMI earlier.