One of the most popular questions from homeowners is how to drop private mortgage insurance (PMI). For some homeowners, refinancing is the best way to drop PMI, because they can also lower their interest rate and save a great deal of money. But for other homeowners, it makes more sense to pursue other options to drop PMI.
What is Private Mortgage Insurance?
When borrowers finance a home with a conventional home loan and less than a 20% down payment, they pay for private mortgage insurance (PMI) until they have at least 20% equity in the property.
PMI payments are affordable, especially in light of the fact that borrowers are financing a home with a low down payment. On average, PMI payments cost around $30 – $100 per month for every $100,000 borrowed, depending on the details of the loan.
Remove PMI by Refinancing
There can be several benefits to refinancing a home, such as getting and lower interest rate and taking cash out of a home.
Homeowners who got their mortgage before July 29, 1999, when the Homeowners Protection Act took effect, often have no other option than to refinance to remove PMI.
By refinancing, homeowners with PMI can often get a new mortgage without PMI and save money. Today, mortgage rates are hovering around historic lows, offering homebuyers who have not recently refinanced an excellent opportunity to refinance and lower their monthly payment.
Drop PMI without Refinancing
If it doesn’t make sense to refinance, and your conventional mortgage started no earlier than July 29, 1999, it is possible to drop PMI while keeping your existing mortgage.
As soon as you have 20% equity in your home, you can request that the PMI be removed. If the equity is based on the original value of your home, you can simply write your lender. But, if it is based on other factors, such as an increase in value due to remodeling, you will need to have a new appraisal on the property which you can then submit to the lender with a request to remove the PMI.
If you do not request that the PMI be dropped, lenders are required by law to automatically terminate PMI payments once the homeowner reaches 22% equity in their home, based on the original property value.
Know Your Rights
The Homeowners Protection Act (HPA) of 1998, also called the “PMI Cancellation Act,” became effective July 29, 1999. This law was specifically designed to help homeowners save money by reducing the unnecessary payment of PMI.
Homeowners with a mortgage starting no earlier than July 29, 1999 are under this law.
The HPA is the law that prescribes borrower-requested cancellation of PMI at 80% LTV (20% equity), and the automatic termination of PMI at 78% LTV (22% equity).
Note: The Homeowners Protection Act does not apply to FHA home loans, so contact your loan originator to review your FHA mortgage regarding termination of mortgage insurance. In many cases, you will need to refinance to drop mortgage insurance with an FHA loan.
Marimark Mortgage serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.