Conventional Loan PlusWhen Does Private Mortgage Insurance Go Away?
If
you have a mortgage with less than 20% down, chances are you're
paying an extra monthly fee for private mortgage insurance (PMI).
While PMI helps you qualify for the loan, it adds costs until you
can eventually remove it. This comprehensive guide covers multiple
strategies for canceling PMI and finally getting rid of that monthly
payment.
Key Takeaways on Removing PMI
- PMI can be canceled once you build 20% of home equity by making payments over time.
- Paying extra toward the principal monthly helps you reach 20% equity faster.
- Refinancing or getting a second loan are other options to cancel PMI immediately.
- You must formally request cancellation; it won't happen automatically.
- Removing PMI provides significant monthly mortgage savings for most borrowers.
What is PMI, and When is it Required?
Private mortgage insurance is another policy that protects the lender if you default on your mortgage payments. It is typically required when you put down less than 20% on a conventional loan.
PMI adds an extra monthly premium to your payments until you build 20% home equity and can request its removal by the lender. FHA loans require mortgage insurance for the entire loan term.
How Much Does PMI Cost?
Private mortgage insurance rates range from 0.5% to 1% of your yearly mortgage amount. A $200,000 loan would equal $1,000–$2,000 annually, or around $83–$167 monthly.
The cost depends on your specific loan, down payment, and credit score. Paying PMI monthly increases your income and total interest costs.
When Can PMI be Canceled?
For most conventional loans, PMI can be canceled once you build 20% home equity through your down payment and monthly mortgage payments toward the principal.
You must contact your lender to request cancellation; it won't happen automatically. An appraisal confirms your current loan balance vs. home value before removing PMI.
How Soon Can I Cancel PMI?
How quickly you reach 20% equity depends on your original down payment, mortgage term, and home appreciation. Paying extra toward the principal monthly shortens the time to hit the 20% threshold.
Most borrowers aim to cancel PMI within 5-7 years. But you may be able to remove it even sooner by making additional payments or if values rise quickly.
5 Ways to Get Rid of PMI
Here are some top strategies for canceling PMI and removing that monthly payment:
1. Make Extra Mortgage payments.
Adding even $50 or $100 extra monthly will pay down your principal faster, so you'll hit 20% equity sooner.
2. Pay Off a Chunk with a Lump Sum
Using a tax refund or bonus to make a lump sum payment toward the principal helps accelerate equity building.
3. Refinance Your Mortgage
If your home value has increased, refinancing to a lower balance may help you cancel PMI immediately at closing.
4. Request an appraisal for Value appreciation.
If an updated appraisal shows your home equity now exceeds 20%, your lender may agree to cancel PMI.
5. Use a Second Mortgage or HELOC to Reach 20%.
A second loan for the difference between your current equity and 20% may allow PMI removal.
Which option works best depends on your unique financial situation. The key is proactively building equity and contacting your lender about the cancellation.
Will My Lender Automatically Cancel PMI?
Most lenders won't proactively remove PMI when you hit 20% equity. You need to formally request cancellation by contacting your mortgage servicer.
Provide updated home value information, like recent sales of comparable properties. Review your amortization schedule to estimate when to hit the 20% threshold.
Proactively requesting PMI cancellation once eligible will save you monthly money. Please don't rely on the lender to do it automatically.
Are There Any Downsides to Removing PMI?
Canceling PMI provides most borrowers with significant monthly savings that outweigh any minor drawbacks like:
-
A small appraisal fee to confirm the home value
-
Mistiming if values then drop suddenly after removal
-
Losing a bit of lender loss protection
For most homeowners, the potential cons are heavily outweighed by the value of eliminating costly monthly mortgage insurance premiums.
How Do I Request Cancellation?
To formally request PMI cancellation:
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Contact your mortgage servicer and ask for removal.
-
Provide evidence, like appraisal reports showing 20% equity.
-
Fill out any required PMI cancellation forms from the lender.
-
Continue making regular payments until approved.
-
Get written confirmation from the servicer once you cancel.
Follow up throughout the process to ensure your request is handled correctly and promptly.
Frequently Asked Questions About PMI Removal
Q: What is PMI, and why do I need it?
PMI stands for Private Mortgage Insurance, which lenders require when you have a conventional loan and your down payment is less than 20% of the home's value. It protects the lender in case you default on your loan.
Q: How can I get rid of PMI?
There are several ways to get rid of PMI. One option is to make extra mortgage payments so your mortgage balance reaches 80% of the home's original value. Another option is to refinance your mortgage to remove PMI if your home has appreciated and you now have at least 20% equity. Lastly, if you have an FHA loan, you can request to remove PMI once you have paid the mortgage for at least ten years and the loan-to-value ratio is less than 78%.
Q: How much do I have to pay for PMI?
The cost of PMI varies depending on the loan amount, your credit score, and other factors. Typically, it ranges from 0.3% to 1.5% of the annual loan balance.
Q: Can I avoid PMI altogether?
Yes, there are ways to avoid PMI. One option is to get a VA loan if you are a veteran or a military service member. VA loans do not require PMI. Another option is to get a piggyback loan, where you take out a second loan to cover the down payment and avoid PMI.
Q: How long do I need to pay for PMI?
A: The time you need to pay for PMI depends on your loan terms and your home's equity. Generally, PMI is paid until you have at least 20% equity in your home or until you reach a certain point in the loan, usually a 78% loan-to-value ratio.
Q: Can I cancel my PMI before reaching 20% equity?
A: It is possible to cancel your PMI before reaching 20% equity in some cases. However, you must meet specific requirements set by your lender, such as making additional payments or demonstrating that your home has been appreciated.
Q: What is the difference between PMI and homeowner's insurance?
PMI is a type of mortgage insurance that protects the lender if you default on your loan. Homeowner's insurance, on the other hand, is a type of insurance that covers you as the homeowner in the event of damage or loss to your property. They serve different purposes and have separate requirements.
Q: How do I terminate PMI?
A: To terminate PMI, you must contact your lender and request the cancellation. Depending on your loan terms and the amount of equity in your home, your lender may require an appraisal to confirm the value of your property. Once approved, your PMI will be terminated, and you will no longer need to pay for it.
Q: Is PMI only applicable to conventional mortgages?
No, PMI is not only applicable to conventional mortgages. It is also required for FHA loans, but the rules for cancellation are different. With an FHA loan, you will need to pay for PMI for the life of the loan unless you refinance to a conventional mortgage.
Q: How often do I have to pay for PMI?
PMI is typically paid monthly as part of your mortgage payment. The exact amount will depend on your loan terms and the size of your down payment.
Conclusion
Shedding burdensome private mortgage insurance premiums starts with understanding your cancellation options. Take proactive steps to cancel PMI as soon as possible and start reaping the savings each month.
SOURCE:
Termination of Conventional Mortgage Insurance
Mortgage Insurance Coverage Requirements
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