Private mortgage insurance removal is on the minds of many homeowners because it makes up a significant portion of their monthly payment. When you put a low- or medium-sized down payment on a home, PMI is the insurance you are required to buy to help the lender not have quite so much risk.
Once you’ve paid off a particular chunk of your loan, or hit a certain timeframe, you have opportunities to learn how to remove PMI. There are a few ways to trigger this removal but if you want to get rid of it as soon as possible, you can pay particular attention to your loan-to-value ratio (LTV) and the way your home’s value has changed in the marketplace.
Ways to get rid of PMI
At some point in your loan, your lender will remove PMI for you, so you don’t have to learn how to get rid of PMI if you don’t want to. However, many mortgage holders are paying $ 100 a month or more in PMI, so getting rid of it could put some cash back in your pocket sooner rather than later.
- Automatic cancellation: The magic number for an automatic cancellation of PMI is 78% loan to value ratio. Loan to value ratio means how much principal you still have to pay compared to the value of the home. Lenders see that the risk that they wouldn’t be able to recoup their losses through foreclosure is much lower when you’ve paid off at least 22% of the value of the house. They also know you have a lot invested in this home at this point, so when that value hits (based on purchase price, not current value), you’ll no longer pay PMI.
- 80% of your home’s original value — 78% is the automatic point, but most lenders will go ahead and remove PMI if you request in writing that they do so at 80% of your home’s original value. Those 2% may not seem like a lot, but it can take many months to pay that much of the house’s value, so you may find it worthwhile to follow your lender’s guidelines for requesting the removal of PMI. That being said, the lender may not grant the PMI removal if you have a history of late or very late payments or if you have other debts like second mortgages or lines of credit on the home. They also may require some proof that the house has held its value, like an appraisal or a broker’s opinion on the value.
- Request PMI cancellation sooner — If you are willing to pay ahead a bit, you can make extra payments on the principal of your loan to get to 80% early, and then accompany those payments with a request in writing for PMI to be cancelled. Make sure to ask when you are getting your loan to begin with whether the lender charges any kind of fee for extra payments or early repayment of the loan.
- New appraisal — Some lenders will let you remove PMI earlier than you might otherwise do so if it turns out that your home has gained a lot of value according to an independent appraiser. If your lender allows this option, you’d have an appraiser evaluate how much your home has grown in value and they’d report that to the lender. Let’s say you bought a home that was worth $ 200,000, and you’ve only paid off $ 30,000 in principal, so you have $ 170,000 left to pay for a 85% LTV. If the appraiser says the home is now worth $ 250,000, your loan to value ratio is now down to 68%, meaning you qualify for the PMI removal due to that big increase in value.
- Refinance — While many people don’t refinance just because it’s how to get rid of PMI, that can be one benefit. If you’ve noticed that property values in your area are going up, and if you see that interest rates are competitive now, refinancing your mortgage can lock in a better rate and showcase that your home is worth more now. If this will also put your LTV below 80%, your loan won’t require PMI either, saving you money. Just know that closing on a new loan comes with its own fees, so make sure that you work out whether that is a worthwhile trade-off in your case.
Know your PMI rights
Private mortgage insurance is a protection for the lender, not for you, so it can be frustrating to pay it (especially if you know that you are going to pay your debts on time). There are protections you can rely upon, however, and you can hold lenders accountable if they try to violate any of these rights.
First and foremost, you deserve to know what the lender’s practices are. You should be very wary of any lender who cannot give you their PMI cancellation policy in writing before you take out the loan. This policy allows you to follow their guidelines and get PMI removed when you were promised you could.
Second, the 78% LTV rule should be observed as an automatic cancellation as long as your payments are current. If your lender gives you other reasons why they cannot remove PMI, you can reach out to the Consumer Finance Protection Bureau to find out more about whether they are allowed to require PMI under your particular circumstances or if they are dragging their feet illegally.
Even if you haven’t reached 78% LTV, the halfway point in your loan (for instance, 15 years into a 30-year loan) is a time when you should be able to stop paying PMI and it should be automatically cancelled. You have the right to ask why it hasn’t been done as long as you are current on payments.
Get to know the Homeowners Protection Act if you worry that your lender isn’t allowing you to remove PMI even when you have completed one of the standard ways to do so. Lenders can set some of their own PMI removal guidelines but if they contradict the HPA, you have the right to point that out and learn how to get your PMI removed anyway.
Too long, didn’t read?
Private mortgage insurance removal is a good way to reduce your overall loan payment and leave yourself with some breathing room in the budget. Once you know how to remove PMI, you can save that money for other things or put it toward the principal and pay off your loan earlier. Knowing the 78% and 80% LTV numbers can help you advocate for yourself with your lender, showing them how to get rid of PMI on your particular loan.
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