The expense of having to keep paying the mortgage insurance (PMI) is felt like a burden. This insurance is nice because it insures the lender but it is an amount of hundreds of dollars added on a month to month payment that does not even go to your benefit. However, the good news is that it is possible to get rid of PMI on your loan and it may save you a good portion of money in the long run. In this guide we will show you how to cancel PMI and what requirements are involved.
What Is PMI?
PMI is an insurance policy lenders require from borrowers who make a down payment of less than 20 percent of the home’s purchase price.
It serves as protection for the lender in case you default on your loan. While PMI benefits the lender, the associated costs can set you back between 0.3% and 1.5% of the original mortgage amount annually, depending on your loan's details and your credit score.
The longer you pay PMI, the more it eats into your home equity and your financial goals. Removing PMI as soon as possible is a logical step for homeowners looking to save money.
How Removing PMI Can Save You Money
Eliminating PMI can create significant savings in two ways:
- Lower Monthly Payments: Without PMI tacked onto your mortgage, your monthly payment instantly decreases, leaving your budget with more breathing room. That extra cash can go toward other financial goals, such as saving for retirement, paying off high-interest debt, or investing.
- More Home Equity: If you're paying PMI, you’re effectively spending money that could be better directed toward building your equity in the home. Removing PMI allows you to retain more of your home value over time.
Steps to Remove PMI
1. Understand When PMI Can Be Automatically Removed
By law, lenders must automatically remove PMI when your loan balance reaches 78% of the home's original purchase price. This is a federal requirement under the Homeowners Protection Act (HPA).
- Example: If your original home price is $300,000, PMI is removed when your loan balance hits $234,000.
However, this automatic cancellation doesn’t guarantee immediate savings. If your home value has appreciated or you’ve paid off a good chunk of your loan early, you don’t need to wait for auto-removal.
2. Calculate Your Loan-to-Value (LTV) Ratio
Your LTV ratio is the percentage of your home’s value that is financed by your mortgage. Here’s how to calculate it:
- Divide your current loan balance by your home’s current appraised value.
- Multiply the resulting figure by 100 to get a percentage.
For example, if your loan balance is $200,000 and your home is now valued at $250,000, your LTV ratio would be:
$200,000 ÷ $250,000 = 0.8 (or 80%)
Once the LTV reaches 80% or lower, you're typically eligible to request PMI removal.
3. Request PMI Removal Early
Don’t want to wait for automatic removal? You can request that your lender cancel PMI once your LTV reaches 80%. Lenders usually require you to submit a written request along with documentation to confirm your home’s value.
What to include in your PMI cancellation request:
- A letter citing your loan account number and stating the reason for your request.
- Proof of home value. This could mean paying for a professional appraisal or providing comparable property sale data in your area.
Your lender may also require that you demonstrate a consistent track record of on-time mortgage payments leading up to the request.
4. Use Home Price Appreciation to Your Advantage
If your home’s value has increased significantly since your purchase, you could qualify for PMI removal sooner. For example, strong housing market trends may boost your home’s appraised value, helping you reach the 80% LTV threshold faster than expected.
Scheduling an appraisal to confirm your home’s appreciation may be worthwhile. Be sure to check your lender’s specific requirements, as some may only accept appraisals from approved professionals.
5. Explore Refinancing as an Option
If you’re unable to meet the PMI removal criteria with your existing loan, refinancing could be a strong alternative.
By refinancing into a new loan with at least 20% equity (or hitting the 80% LTV ratio), you can eliminate the need for PMI altogether.
Refinancing Pros:
- Potentially lower interest rates.
- Eliminate PMI immediately.
- Opportunity to adjust loan terms, such as moving from a 30-year to a 15-year mortgage.
Refinancing comes with closing costs, so ensure the overall savings outweigh the costs before committing.
6. Be Persistent and Follow Up
Lenders may not be proactive about removing PMI, so it’s up to you to remain diligent. After submitting your request, make sure to follow up promptly and confirm when the updates will take effect.
You should also carefully review your mortgage statements to ensure PMI charges have been removed once eligibility is confirmed.
Tips for Faster PMI Removal
- Make Extra Payments: An effective way to hit the 80% threshold faster is by making additional mortgage payments.
- Monitor Your Home’s Market Value: Keep tabs on your local real estate market. Your home value may rise quicker than you expect, helping you reach that key equity milestone.
- Maintain Great Credit: A solid credit score can help make refinancing or requests for PMI removal smoother and more achievable.
Benefits of Professional Guidance
Navigating the details of PMI removal can feel overwhelming, especially with varying lender requirements. Working with a mortgage professional can simplify the process and identify the best course of action for your unique situation.
They can:
- Provide expert insights tailored to your loan.
- Help you prepare for appraisals.
- Evaluate whether refinancing makes financial sense
Final Thoughts
Eliminating PMI isn’t just about saving money; it’s about taking charge of your financial future. By reaching out to your lender, staying informed about your home’s value, and making proactive payments, you can significantly reduce your mortgage costs. Whether you’re just starting on your homeowner’s journey or close to meeting the eligibility requirements, taking the steps outlined in this guide will help you keep more of your hard-earned money.
