PMI coverage protects lenders against losses should homeowners default on their mortgage and can add up quickly, but thanks to federal legislation borrowers have an easier path toward cancellation of PMI.
Under current federal regulations, homeowners can cancel mortgage mortgage insurance (PMI) when their balance reaches 20% of original home value. Work with your lender to assess multiple loan options without PMI as soon as you reach this threshold.
What is PMI?
Mortgage insurance policies protect lenders in case of your default, protecting their investment in your home from being lost. Conventional loans with down payments of less than 20% require PMI as an insurance requirement.
Your lender can provide an estimate of your monthly PMI cost in your Loan Estimate and Closing Disclosure mortgage documents. Alternatively, you could pay one upfront premium instead of monthly installments to reduce total closing costs but increase monthly mortgage payments.
Numerous factors contribute to the cost of PMI, such as your down payment amount, credit score and type of mortgage you choose. According to estimates from The Urban Institute, homeowners typically pay between 0.5%-1% of their original loan amount each year in PMI payments – though one major determining factor will always remain your loan-to-value (LTV) ratio; it shows how much your loan balance exceeds the value of your home.
How much does PMI cost?
Your monthly PMI premium depends on a variety of factors such as home price and loan amount, down payment amount and your credit score. Most lenders use an automated system to estimate these costs on closing day and send this information along with their loan estimate document.
In general, the larger your down payment and debt-to-income ratio are, the lower your PMI costs will be. Improving your credit score before applying for a mortgage could even enable you to avoid it completely!
Federal regulations allow you to cancel private mortgage insurance (PMI) when your loan balance falls below 80% of original home price and you have achieved 20% equity in your property, though refinancing may not always make economic sense when trying solely to cancel PMI; refinancing typically only makes financial sense when interest rates are competitive and new appraisal costs can be covered; otherwise your payments could decrease and homeownership sooner with seller contributions towards closing costs offering ways of eliminating PMI upfront.
Can I get rid of PMI?
PMI can be removed in several ways, including making a 20% down payment or more of the purchase price, refinancing to another lender that doesn’t require PMI, or refinancing with one. Before doing either of these things, however, be sure that paying extra to remove PMI won’t lead to higher loan terms and closing costs compared with what would otherwise apply – paying extra could result in an increase of your interest rates than what might otherwise apply.
Once your principal balance reaches 78% of original home value – or the date specified in your mortgage insurance disclosure form – you can ask your lender to cancel PMI. Federal law doesn’t mandate automatic cancellation once equity hits 80%; so make sure to request this change!
An additional option would be to consult an appraiser about reappraising your home, though this will add several hundred dollars to the cost of your mortgage and should only be attempted when you have attained 20% equity in your property.
What are my options?
Banks typically require private mortgage insurance (PMI) from borrowers who do not make a 20% down payment or higher when purchasing conventional mortgages. There are various forms of PMI available, with most being paid for monthly or as an upfront premium added directly onto the loan balance.
Your credit score plays a large part in how much PMI insurance costs, and having a higher one can allow you to qualify for lower rates and save thousands annually. Furthermore, using funds from your 401(k) or gifts from family to make a larger down payment and thus decrease loan-to-value ratio and PMI premium costs further.
Your lender can cancel PMI when refinancing, provided your loan balance falls below 80% of original home value. In such an instance, however, an appraisal service chosen by your lender must conduct another one – which could cost hundreds. Alternatively, cancellation can also be requested on current market value basis but requires full appraisal with all subsequent updates which could take years before being completed.