Make savings for a 20% down payment or use a piggyback mortgage – making a 10% down payment on your home and then taking out another, much smaller mortgage – in order to avoid PMI.
Conventional lenders must provide you with an annual disclosure statement outlining your right to cancel PMI when you reach 20% equity in your home. They also have additional requirements that must be fulfilled for this cancellation to occur, such as consistent payments history and appraisal review.
How Much Does PMI Cost?
PMI may enable homebuyers to qualify for mortgages without making a 20% downpayment, yet it adds hundreds of dollars per month to loan costs – though this might be necessary to secure your dream home sooner than imagined!
Your payment for PMI depends on a combination of factors including property’s value, your credit score and debt-to-income (DTI) ratio; as these increase so will your PMI premiums. The higher these numbers are, the more expensive PMI premiums become.
PMI costs can either be paid upfront or added to monthly payments, and lenders usually offer hybrid options where you pay some of it up front and some every month. Your loan type, occupancy level and home type (single family or multifamily home) all impact how much PMI coverage will cost. Once you reach 20% equity in the home you can request that your lender cancel this coverage; some will do this automatically upon reaching this milestone; but to get this cancelled you must meet certain conditions such as having no second mortgages outstanding and an excellent payment history as well.
How Can I Get Rid of PMI?
There are two strategies you can employ to remove PMI: either making regular payments until you reach 20% equity, at which point your lender must cancel it, or refinancing into a loan type which doesn’t require it.
Both options involve closing costs, so it is essential to carefully consider their relative advantages and disadvantages. You may be able to forgo PMI altogether by making a substantial down payment that strengthens your finances while qualifying you for more affordable mortgage terms.
Once you reach 20% equity or your LTV exceeds 80%, or have a conventional loan with an LTV greater than 80%, you can ask your servicer to remove PMI. However, certain criteria such as having met regular mortgage payments must also be fulfilled to do so successfully. Extra payments designated towards paying down principal balance could help accelerate repayment as well.
Can PMI Be Cancelled?
Conventional mortgages (those not backed by the federal government) typically require PMI when your down payment falls below 20%. This fee is added directly onto your loan payment each month and directly tied to your lender. Under the Homeowners Protection Act, your servicer must automatically cancel this insurance when your loan balance reaches 78% of original purchase price of your house.
However, you can request in writing for your PMI policy to be cancelled earlier than this deadline. Your servicer should consider your request carefully and may require proof of current property value such as an appraisal report.
Your PMI premium can also be reduced more quickly by taking advantage of an array of factors, including rising property values in your area and investing in home improvements yourself. In order to meet these requirements, however, on-time payments and clean credit histories must first be demonstrated; your lender may impose other conditions such as minimum loan term length or no second mortgages before cancellation can take place.
What Happens If I Cancel PMI?
Good news is that when your mortgage balance reaches 78% of its original value, lenders are legally required to cancel PMI automatically; if you want it gone sooner though, early cancellation may be possible in certain circumstances.
Most lenders require you to have an independent appraisal done (at your cost) to demonstrate that the current value of your home remains above its original appraised value. Furthermore, you’ll also require an excellent payment history with no other liens such as second mortgages or home equity lines of credit on it.
Your mortgage contract should outline when your lender will consider cancelling PMI if all requirements have been fulfilled, or speeding up eligibility by making extra mortgage payments each year directly toward principal balance, helping reach 80% LTV faster. Check out NerdWallet’s loan-to-value calculator to determine your LTV ratio and learn about possible savings from early termination.