PMI is required on conventional mortgage loans with less than 20% downpayment, not to protect you as a borrower, but rather to safeguard the lender against losing money if your payments fail.
You may be eligible to drop PMI once your loan balance reaches 80% of original value or when reaching 20% equity in the property, though it’s wise to consult your lender about available options before making this decision.
What is PMI?
PMI (Private Mortgage Insurance) is an optional mortgage insurance offered by lenders to cover their risk on conventional loans that comply with Fannie Mae and Freddie Mac standards – government-backed enterprises which back mortgage loans backed by Fannie and Freddie. PMI allows buyers with low credit scores and smaller down payments to purchase homes that would not otherwise qualify.
Your lender charges PMI as a monthly premium that’s added onto your mortgage payment, or in some cases as an upfront premium at closing – these fees should be detailed on page one of your Loan Estimate and Closing Disclosure document under “Projected Payments.”
PMI cancellation can be obtained when you achieve 20% equity or refinance into a loan without it such as one offered by USDA or VA mortgage programs. Some lenders may allow additional payments toward your principal balance to help speed up this goal more quickly; make sure to inquire if this option exists and ask how this additional money will be applied before proceeding with extra payments.
How do I get rid of PMI?
How Can I Drop PMI and Cancel PMI Premiums? There are various strategies you can employ to cancel PMI, although most involve refinancing. Depending on your lender, ask them to cancel it when your loan balance reaches 80% of original value or you have 20% equity in the property; additional payments made towards principal may also help cancel it early, along with tools like Zillow’s Zestimate which show your property has increased substantially in value.
Another option to reach 20% equity quickly and affordably is taking out a second mortgage, otherwise known as a piggyback loan. But this strategy may come with additional costs that don’t make sense given your financial circumstances. Finally, refinancing to eliminate PMI may offer potential cost savings but comes with its own set of closing costs and interest rate risk; before opting to do this be certain the cost savings exceed these upfront expenses.
Can I get rid of PMI if I make a down payment?
Simply ask your lender to cancel PMI on the date your loan balance reaches 80% of original home value or your amortization schedule, which should happen around five years later. Alternatively, make extra principal payments or experience an increase in home values that has led them to cancel earlier – though an appraisal may be necessary as proof.
Refinancing may also be an option, although this will incur closing costs and possibly an origination fee. Finally, home equity loans or lines of credit that take into account your property’s current value instead of what was original priced or appraised when purchased may provide more flexibility – however lenders must still ensure you can pay on both mortgages simultaneously! However this approach may prove more challenging as lenders will need assurance you have an acceptable payment history as well as being able to afford higher debt-to-income ratios that come with second mortgages.
How much does PMI cost?
PMI typically costs 0.3%-2% of your loan balance each year and must be added onto any existing interest payments on conventional conforming loans backed by Fannie Mae or Freddie Mac (government-sponsored enterprises that back most mortgages).
Your lender typically arranges PMI either upfront or monthly. Upfront premiums add to the closing cost but lower monthly payments; monthly PMI payments are the more popular arrangement.
Cost of PMI depends on various factors, such as your credit score, debt-to-income ratio and size of down payment. A higher credit score and larger down payment indicate lower risk to lenders and result in reduced PMI premiums.
Once your home value increases or equity reaches 20%, you can request cancellation from your lender; just be sure to understand their requirements first or else you could end up paying PMI forever!