For many homeowners who opt for a conventional mortgage with less than a 20 percent down payment, Private Mortgage Insurance (PMI) becomes a necessary part of their monthly expenses. PMI is an additional charge on your mortgage payment, primarily designed to protect the lender in case of default. However, there are several ways to eliminate this extra cost, which can save you a significant amount over the life of your mortgage.
When Does PMI Go Away?
The Homeowners Protection Act of 1998 set forth guidelines for the automatic termination of PMI. According to the Act, PMI must be removed by the lender once the borrower attains a 78 percent loan-to-value (LTV) ratio. This means that when you have paid down your mortgage to 78 percent of the original purchase price of your home, PMI should be lifted automatically.
For instance, if you bought a home for $300,000, PMI would be removed when your mortgage principal falls to $234,000. It’s important to note that PMI costs decrease as you pay down your loan, and are completely removed when you reach the required LTV ratio.
How to Get Rid of PMI
While PMI can add hundreds to your monthly mortgage payment, there are several strategies to get rid of it:
1. Wait for Automatic or Final Termination
Under the Homeowners Protection Act, PMI is automatically terminated once your LTV ratio hits 78 percent. Alternatively, PMI must be cancelled at the midpoint of your loan’s amortization schedule, regardless of LTV ratio. This applies if you’ve been making regular payments and are in good standing with your lender.
2. Request PMI Cancellation at 80 Percent Mortgage Balance
You can request to cancel PMI when your mortgage balance reaches 80 percent of your home’s original value. This requires a proactive approach, including a written request to your lender and ensuring you meet other lender-specific requirements.
3. Pay Down Your Mortgage Early
Making larger or additional mortgage payments can expedite reaching 20 percent equity, allowing you to request PMI cancellation sooner.
4. Refinance Your Mortgage
Refinancing might be an option if you’re close to the 20 percent equity mark, especially if you can secure a loan that doesn’t require PMI.
5. Reappraise Your Home
In a thriving real estate market, your home’s value might increase enough to push your equity over the 20 percent mark, qualifying you for PMI cancellation.
6. Home Improvements
Significant improvements to your home might increase its value, potentially raising your equity to the required level for PMI cancellation.
Caution: Don’t Drain Your Assets
While eliminating PMI can be financially beneficial, it’s crucial not to deplete your savings or investment accounts in the process. Maintaining a balance of liquid assets for emergencies is a wise financial strategy.
Know Your Rights Under Federal Law
The Homeowners Protection Act ensures your right to eliminate PMI under specific conditions. Familiarize yourself with these provisions and keep track of your mortgage payments and home value. If you believe your lender is not complying with PMI removal regulations, you can file a complaint with the Consumer Financial Protection Bureau.
Paying off your PMI can be a financially savvy move, saving you thousands over the life of your mortgage. By understanding the rules and keeping a vigilant eye on your mortgage balance and home value, you can take steps to remove this extra charge as soon as you’re eligible. Remember, the responsibility to initiate PMI cancellation often lies with you, the homeowner, so stay informed and proactive in managing your mortgage costs.