Buying your first home with a minimal down payment sounds, at least on the surface, like a great plan. After all, adulting costs money and you’ll need funds to buy furniture, appliances and other household items.
Before you go looking for a mortgage lender willing to let you buy your next home without a significant down payment, though, there’s a dirty set of initials you should know about: PMI. Short for private mortgage insurance, this is extra mortgage insurance that’s tacked on to conventional home loan purchases made with less than 20% down. Any time you make a down payment of less than 20% on a home purchase with a conventional loan, you’ll need to pay for this insurance.
When does PMI go away? It’s the gift that keeps on giving — you’ll be on the hook for PMI every month until you reach a certain milestone. That extra fee alone could potentially add $ 100 or more to every mortgage payment. Here’s what you need to know about how to get rid of mortgage insurance.
What is private mortgage insurance?
Private mortgage insurance is a form of insurance coverage that protects your lender if you stop paying your mortgage. The trouble is that for borrowers, PMI is a waste of money. It only protects the lender in case you default; it doesn’t cover anything on your end. You’ll be paying for it, though. If you default on your mortgage, PMI makes your lender whole, but does nothing for you.
The typical mortgage insurance policy will cost you between 0.41% and 1.61%, though the amount will vary based on a number of factors. In general, that averages to about 1% for PMI. Using a median rate of 1% mortgage insurance, a $ 300,000 mortgage will cost you another $ 3,000 per year (or $ 250 per month) in PMI.
How do people get PMI?
Lenders figure that the less money you have invested in a home, the easier it is for you to walk away from the mortgage without paying and stick them with the bill. If you’re planning on buying a home and putting less than 20% down, expect to be seen as risky by lenders. You’ll need to pay PMI on your mortgage loan.
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Your lender will make all the arrangements for the extra mortgage insurance. In most cases, you’ll need to pay for PMI monthly, and it will be tacked onto your mortgage bill. In some cases, you may need to pay the premium in full upfront, although that’s less likely of a scenario. If you need to pay for mortgage insurance, it will show on your loan estimate at closing.
How to remove private mortgage insurance
When you consider the thousands you may pay in PMI over the long run, saving up for a larger down payment often makes more fiscal sense. You may want to consider that prior to getting a mortgage with PMI tacked on.
If you’re already paying for mortgage insurance, there is light at the end of the tunnel. Once you have built at least 20% equity in your home through mortgage payments or property appreciation (or both), you can ask the lender to remove the private mortgage insurance. Don’t assume that once you hit the magic number of 20% a bank or mortgage company will stop billing you for PMI, though. They’re not legally required to do so until you’ve hit 22% equity.
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You might be able to get rid of PMI by starting the process yourself at 20%. Some lenders will remove it at that point. To get rid of PMI at 20% equity, you’ll need to write a letter to your lender asking to have the PMI removed. The letter should explain why you’d like the private mortgage insurance canceled.
Some valid reasons you can provide include:
- You’ve made enough payments and now have built up between 20% to 22% equity in the home.
- You noticed property values in your neighborhood have shot up and you suddenly have more equity in your home. Say your home purchase was $ 300,000. You still owe $ 280,000 but the similar house next door just sold for $ 350,000. You can have your home appraised and if it comes in close to $ 350,000, you now have enough equity to ask the lender to stop with the mortgage insurance.
- You recently remodeled the home, upgrading your kitchen and bath, adding significant value to your property. Contact your lender about getting a new appraisal to show the increased value of your home.
Should you get rid of your PMI?
There are usually two sides to everything — the benefits and the drawbacks. In the case of private mortgage insurance, there really isn’t any good reason why you should keep paying for it if you no longer have to. PMI doesn’t provide you with any protection or benefit — other than to let you buy a home with less than 20% down with a conventional loan.
You should definitely try to get rid of PMI as soon as you can. There are better ways to spend the money, such as towards an emergency savings fund. Or to make extra mortgage payments. Or to fund your retirement account.
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To get rid of mortgage insurance, you’ll need to stay on top of your equity. Calculate the number you need to hit as your loan principal before you can request PMI to stop. You can use a loan amortization calculator to guesstimate the date of when you’ll reach the target amount to mark. You can also sign up for neighborhood updates on recent sales or check out the recent sales data for your neighborhood every now and then to see how your home’s value is doing.
Too long, didn’t read?
Mortgage insurance protects the lender in case you default on your mortgage. The problem is, you’ll need to pay for the PMI and it isn’t cheap. Knowing how to get rid of PMI is essential. Lenders aren’t legally required to remove it until you hit 22% equity in your home, but once you have at least 20% equity you request it to be removed and the lender may comply. Keep an eye on how much you owe on your home. Stay on top of increases in property values in your area. The moment you see your equity grow over 20%, send your lender a letter asking them to stop charging you for mortgage insurance.
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