FG Trade/getTyimages; Illustrations by Hunter Newton/Bankrate
If you cut your home under 20% with a traditional mortgage, you’re probably familiar with PMI or private mortgage insurance. This is a policy you must purchase to protect your lender if you default to your mortgage, and you usually pay premiums as part of your monthly mortgage payment, but it won’t last forever. Here’s how to get rid of it:
When will the PMI disappear?
The Homeowner Protection Act of 1998 (HPA) requires that a mortgage lender or servicer automatically cancel a PMI when the mortgage loan (LTV) ratio reaches 78% of the home purchase price, or after the loan period reaches 15 years on a 30-year loan.
How to get rid of PMI
- Wait for the PMI to auto or final exit.
- When your mortgage balance reaches 80%, you will request a PMI cancellation.
- Pay off your mortgage quickly.
- Refinance your mortgage.
- Recreate your home.
1. Wait for PMI to auto or final end
This is a handoff option. Wait until the lender or servicer cancels the PMI. Don’t forget that this will automatically occur when your mortgage balance reaches 78% of the home’s purchase price, or the first day of the month following the half of the loan term.
2. Request a PMI cancellation when your mortgage balance reaches 80%
The first option is most convenient, but if you wait for the lender to automatically cancel your PMI, you will pay more than you need. Instead, when the mortgage balance reaches 80% of the home purchase price, the lender can request that the PMI be cancelled earlier. Here’s how:
- Make a written PMI cancellation request to the lender or servicer.
- Be up to date with mortgage payments with good payment history.
- Make sure there are no other liens in your home – for example, a second mortgage.
- If necessary, get a household rating to ensure that the value of the home is not degraded.
Assuming your payments are made on schedule, you can find a date when your loan balance reaches 80% on your PMI disclosure form. If you do not have this form, please request it from your servicer.
3. Pay off your mortgage early
If you have the budget, pay the principal an extra and you can hit 20% of your shares faster. To estimate how much you need to reach your mortgage balance, multiply the home purchase price by 0.80 to qualify for a PMI cancellation.
You can advance your mortgage in several ways, such as making biweekly or additional payments each year, or paying one lump sum payment at any time. Check with your lender or servicer to ensure that additional payments arrive at the principal of the loan, rather than the next payment or interest.
4. Refinance your mortgage
If your mortgage rate drops, refinancing to a new loan with a lower balance can help you reach the PMI cancellation window earlier. However, refinancing costs money, but it usually makes sense if you can lower your interest rates.
5. I’ll re-claim your home
Your home could reach 20% equity level prior to your mortgage payment schedule if you make a significant improvement due to a price increase or if you make a significant improvement that increased its value.
In this case, consider paying for a new valuation. If you have owned the home for at least five years and your loan balance is less than 80% of your new valuation, you can request a PMI cancellation. If you own a home for at least two years, your remaining mortgage balance must be less than 75%.
The rating usually costs several hundred dollars depending on the location and the characteristics of your property. Some lenders may be willing to accept the broker’s price opinion instead, but this is often a little cheaper.
Is it worth getting rid of the PMI?
When it comes to getting rid of PMI, you don’t have to be enthusiastic. Paying a PMI every month or as a temporary amount each year is not a monetary Joylide.
“Unless you’re taking out a FHA loan, you’re not married to PMI,” says Greg McBride, CFA, Chief Financial Analyst at Bankrate. “Once you achieve 20% equity cushioning, it could be a few years away in response to rising home prices. But don’t feel the need to use the last nickel of cash to avoid PMI and leave little financial flexibility behind.”
This can be especially true if you have purchased or refinanced a home within the past few years and have a low mortgage or refinance rate. It may be financially pointless to withdraw your money from valuing high yields and investments to pay off a relatively low-cost mortgage.
