When purchasing a home, many homeowners end up with Private Mortgage Insurance (PMI) added to their mortgage. While this is frustrating and adds to monthly costs, it is usually unavoidable under the circumstances of the loan.
Often when a buyer takes out a conventional mortgage and provides a down payment of less than 20% of the loan amount, they have to pay PMI each month until their equity gets to 20% or more.
Fortunately, there are ways to remove PMI from a mortgage loan. Here are some ideas to consider.
Note: This article does not discuss mortgages where PMI remains for the life of the loan, as with FHA and USDA home loans.
Allow the PMI to Drop Off
As a homeowner makes mortgage payments, they gain equity in the home. Over time, the loan amount will drop to below 80% of the home’s value. Once this milestone is passed, PMI can be removed from the loan.
Generally, when the loan-to-value ratio reaches 78%, or you reach the midpoint of your amortization schedule, the bank will remove PMI automatically. Before this point, the homeowner must make a formal request for the removal of PMI.
To have PMI removed, the homeowner needs to be current on payments. To reach this point faster, some buyers decide to put extra money toward their mortgage. Some pay half the mortgage payment every two weeks, which equals an additional payment each year.
As the payments continue on or ahead of schedule, a homeowner will reach the required mark and be able to stop paying PMI.
Request PMI Cancellation At 20% Equity
Many homeowners are surprised that the PMI is not automatically canceled at 20% equity. If they do not want to wait until they hit 22% for automatic removal, they can generally request cancellation at 20%.
The PMI disclosure statement will show the date the equity will reach 20%. A borrower has to request the removal of PMI in writing and will need to be current on payments to have PMI removed.
Sometimes the bank will require the homeowner to prove that the home value has not decreased, so the borrower may need to pay for an appraisal.
If everything comes back as expected, the PMI can be removed if the buyer has reached 20% equity.
Refinance to Get a Better Deal
Homebuyers who do not want to wait for their equity to climb may be able to get a different mortgage to remove PMI. A borrower may also qualify for better interest rates. This combination can lead to a significant decrease in monthly payments.
This strategy generally only works for those who have been in their home for at least two years. Mortgage rates in 2020 are at historic lows, so getting a better rate is possible, especially if the borrower’s credit score has improved since the first loan.
If the borrower gets another conventional loan, they can eliminate PMI if the equity is at least 20%. If the home has appreciated since the initial mortgage, this is a great way to take advantage of it. Many real estate markets are red-hot, so home values are rising quickly.
Another option is to refinance into a loan that does not require PMI, even with lower equity. Some banks and lending institutions offer this, although these non-PMI products may have higher interest rates.
A buyer who is thinking about refinancing should carefully consider closing costs. These upfront costs can make a refinance more expensive than expected and may offset the savings of removing PMI.
Get a Home Appraisal
A fourth way to remove PMI is to have an appraiser re-appraise the home. Because property values have been moving up quickly in many real estate markets, this is a good way to see if equity has increased beyond the regular mortgage payments.
A home appraisal costs a few hundred dollars, so it is important to feel confident that the property value is higher. This option is best after five years from the home purchase date. Some loan companies allow a reappraisal after as little as two years but require 25% equity instead of 20% to remove PMI at that time.
If a home buyer has upgraded their property or lives in a hot real estate market, a reappraisal may allow them to remove PMI earlier than expected. It’s a worthwhile investment for many homeowners.
Is it Time to Remove Private Mortgage Insurance?
Many homeowners look to remove PMI as early as possible to get relief from the extra expense. However, it is also important not to make one’s financial position worse when pursuing 20% equity.
There are a lot of financial expenses associated with owning a home. Trying to get to 20% equity without budgeting for other needs is likely to cause issues.
A lender must allow PMI to be canceled once requirements are met. However, those rules vary from lender to lender. A borrower should carefully review the PMI rules before agreeing to a mortgage.
The good news is that PMI is not forever. Eventually, a buyer can remove it and move on with much lower payments.
Marimark Mortgage is based in Tampa, Florida, and 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.