Getting rid of Private Mortgage Insurance (PMI)

Private mortgage insurance, or PMI, helps to protect the lender in case you default on your mortgage – and the obligation is on you to pay for that protection. Normally, lenders will require you to purchase private mortgage insurance if you have less than 20% to put down or if you refinance and have less than 20% in equity in your home.

Lenders require PMI to hedge the risk of you defaulting on your mortgage loan and the foreclosure not generating enough to cover the balance of your loan plus the lender’s fees. This protection is not cheap, and you’re left footing the bill. As an example, on a $250,000 loan, you could be paying as much as $210 a month.

In a perfect world, you can avoid PMI by waiting to buy until you have saved at least 20% to put down. The realities of life don’t always allow for that through. Taking on the expense of PMI allows you to purchase a home, and start building equity, while you might otherwise be waiting months or years. The purchase and the burden of PMI makes sense when house values are rising, or if the interest rates are low and you want to make sure you are able to lock in today’s rates.

Regardless of how you got there, you’ll want to get rid of PMI as quickly as possible. Below you’ll find the rules and guides on dropping PMI and riding your budget of this expense.

 

When can I stop paying PMI?

As long as you are current on your mortgage payments, you can stop paying PMI as soon as your loan balance falls to 80% of your homes value. If your home is worth $250,000, you would need to owe $200,000 or less to stop the payment of PMI.

Although your loan will eventually fall to 80% of your home’s value if you continue making your payments, this process can take years as most of your payments are going towards interest in the first years of your mortgage. If you bought a $250,000 home with 10% down payment, your loan balance would be $225,000. You would need to pay that balance down to $200,000 to get rid of the PMI payment. Assuming you have a 30 year fixed mortgage at 4.5%, your loan balance would drop below that threshold only after 6 years.

Making extra payments and rising real estate values could both help get that balance down to 80% faster. If your $250,000 house is now worth $300,000, you’d no longer have to pay PMI because your remaining balance would be roughly 73% of what your house is currently worth.

 

How can I stop paying PMI?

If you believe your balance has dropped to 80% you can send a written request to your lender asking for them to remove the PMI. This request must include your loan information, property address and information on the equity you believe you’ve built in your home.

In most cases the lender will require a professional appraiser of their choosing to give a current value of the home before proceeding, and will most likely ask you to pay for it. The lender won’t just take your word for it though, an appraisal is necessary if your request to drop PMI is based on an increase in the homes value. Many lenders will even require an appraisal when your request is based on a decrease in the loan balance. The necessity for an appraisal in that case is to ensure that your home hasn’t declined in value since you obtained the mortgage.

If you want to save yourself the cost of the appraisal, lenders are required to automatically drop PMI once your loan balance falls to 78% of the original value of the home when you took out your loan. Regardless of the current value of the home, the lenders still can’t require PMI so long as your are current on your mortgage. While you are saving money on the appraisal, you could be paying for PMI a lot longer then you have to by waiting to reach the 78% mark. With a $250,000 home, your loan balance would be below 78% of its value ($195,000) only after 84 months. That amounts to $2,275 if your PMI costs you $175 and you are making the additional 13 payments.

In most cases, the cost of the appraisal is well worth it. As you get close to the 80% mark, or if you feel your home’s value has increased, you can check the comparable home sales in your area to get a rough estimate of what your home would appraise for. If the comparable sales support your beliefs, you should definitely write your lender to request the removal of PMI.

For more information click here to schedule a call with our advisor. We will be happy to provide expert advice and support you throughout the mortgage process.


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