Good news is that PMI expenses don’t have to be permanent expenses – typically, they can be dropped when loan balance reaches 80% of original purchase price or they attain 20% equity in their home.
Reducing your timeframe to reach these benchmarks faster by making larger or additional mortgage payments or refinancing can speed things up significantly.
What is PMI?
PMI, or Private Mortgage Insurance, is an annual cost that’s added onto your loan payment and used to protect lenders against losses in case you default. It applies only to conventional loans meeting criteria set by Fannie Mae and Freddie Mac – government-sponsored enterprises that buy mortgages from private lenders – that qualify.
Payment Protection Insurance can either be included as part of your upfront closing costs or added by your lender to your mortgage loan agreement. Lenders use one of seven PMI companies with rates varying, so speak with them for pricing details; typically 0.3% to 2% of your original loan amount is covered each year in PMI payments.
As PMI does not protect borrowers in any tangible way, many homebuyers seek ways to eliminate it or cancel it altogether. One approach would be making a larger down payment; however, that may not always be feasible, especially for first-time homebuyers with limited cash on hand. Others may qualify for loans backed by the Federal Housing Administration or Department of Veterans Affairs that typically have lower down payments than conventional loans.
How much does PMI cost?
PMI premiums can be added to your mortgage payment each month; they help lenders offer loans to borrowers without large down payments; however, PMI doesn’t protect borrowers against foreclosure like homeowners insurance does.
PMI costs can differ based on loan type, borrower credit history and property type. Adjustable-rate mortgages often carry higher rates than fixed rate loans; additionally, PMI could cost more if loan used as investment property or second home purchase loan.
Your lender will include the PMI amount in your Loan Estimate and Closing Disclosure before signing loan documents, so you should ask them how you can avoid paying PMI altogether. Typically for conventional mortgages it is possible to have PMI cancelled once your loan balance reaches 80% of original appraised value or 20% equity; with FHA and VA loans backed by federal governments the rules might differ somewhat.
Can I get rid of PMI?
Lenders typically require PMI on mortgage loans with loan-to-value ratios above 80%. Borrowers can often avoid this requirement by making regular payments until they build 20% equity in their home and reaching 20% equity status.
If you wish to expedite the process of cancelling PMI faster, you could ask your lender to cancel it based on its current value – though this could prove more expensive than anticipated.
Refinancing may also help eliminate PMI; however, this option may not suit everyone.
When refinancing, be sure to shop around for the best rates. There are seven PMI companies in the country and each offers different prices; using a mortgage broker may help you identify these better offers and save on PMI premiums. Also take into account any closing costs or potential higher interest rates when considering your options.
How do I get rid of PMI?
Once you’ve reached 20% equity in your home through consistent payments, or when your loan balance reaches 80% of its original value (this should be noted on your mortgage disclosure form), you should request for your lender to remove PMI from your mortgage loan.
An alternative way of building equity faster is making extra principal payments each month – but beware: this approach may not save as much than waiting for automatic cancellation.
If you have completed extensive renovations on your home, it may be possible for your lender to waive PMI. In such a scenario, submitting a request with evidence that these improvements total more than 20% of its value and haven’t decreased since purchasing is key in order to qualify for this option.