How to Eliminate Private Mortgage Insurance
What’s PMI and why am I paying for it? So many new homeowners, especially 1st time home buyers have no idea what PMI even is. We’ll break down what PMI is and even more importantly… how to get rid of it!
So many homeowners want to know how to eliminate their PMI aka private mortgage insurance.
If you’ve recently bought a home without giving a down payment of at least 20 percent, then you were probably required to get private mortgage insurance. Some new homeowners tend to get so caught up in the excitement of buying their new home, they didn’t even notice their insurance payment was a little high.
In the beginning, you don’t even care… but as the months go by and you check out your mortgage bill you say wow!… my PMI is expensive!
Of course, your first thought is “how do I get rid of this PMI?” This is actually one of the questions I get asked most often as an Orlando real estate agent.
The truth is, getting rid of private mortgage insurance isn’t that hard when you follow a few steps.
What is PMI or Private Mortgage Insurance?
My first-time homebuyers will ask me what is private insurance and why do I need it? Private mortgage insurance is in place to benefit the lender. It ensures the lender will be covered in case you stop making payments on your loan. If the home becomes a foreclosure, then the lender is covered against non-payment.
The lender considers you to be high risk because you didn’t have enough to cover 20% of the contract price. They want to be sure that if you can no longer make your payments, they are still covered. PMI unfortunately can substantially increase your mortgage payment.
For example, if you buy a house for 300k and your PMI is .5%, then you’re paying an extra $1,500.00 per year. That comes to $125 per month. That’s money you could’ve used towards other bills. The kicker is that PMI is of no benefit to you and only benefits your lender… even though YOU pay for it!
How much is private mortgage insurance?
The cost of your PMI will depend on a few different variables like the size of your down payment and your credit score. PMI payments can range from 0.3% all the way to 1.5%.
Generally, a loan with a smaller down payment will carry a much higher interest rate. If trying to decide between a loan with PMI and one without, you need to calculate the overall monthly cost of both loans before deciding.
When you understand these costs, it will help you determine what the best option is for you and your current financial situation. You should also consider other popular loan programs like an FHA mortgage.
No one wants to overpay on a mortgage because that’s just throwing money away! That’s why knowing exactly how to cancel your private mortgage insurance is of extreme importance to you.
How is PMI paid?
If you have to pay PMI, you should know how it will be paid. Ask your lender if you have a choice on how to pay for your PMI.
The 3 most common ways you can pay PMI:
- A monthly payment which is rolled into your mortgage payment.
- A 1 time fee when you close AKA single premium mortgage insurance.
- Combination of monthly payments with a partial payment at closing.
Eliminating PMI Early
How can you stop paying PMI altogether? It’s pretty simple, all you have to do is pay down your mortgage to 80% or less.
Easier said than done for a lot of folks. Most homeowners in Orlando will take some time in getting to that point. Although this is the only sure-fire way to get rid of PMI early, you may want to consider these options:
Refinance to stop paying private mortgage insurance
You may be able to refinance your home if you believe your home has gone up in value. If you can qualify for a loan for less than eighty percent of the home’s worth, then you may be able to get rid of your PMI.
A few things to consider here… You need to decide if your loan rate makes sense financially. If your payment ends up being the same because of the higher interest rate, then it probably doesn’t make sense to refinance.
Get an appraisal to end PMI early
If you believe your home has truly gone up in value, you might be able to convince your lender to drop the PMI. By having a new appraisal done, if your house has gone up in value enough, there’s a chance you might be able to convince your lender to drop the PMI altogether.
The appraisal will need to prove that your home’s current value will hit the 80 percent threshold. Before ordering an appraisal, you need to make sure your lender is on board. If not then you’ll just be wasting your money on an appraisal you don’t need.
Upgrades may help you stop paying PMI
Another way to increase your home’s value so that it reaches the 80% mark is to do some remodeling. Keep in mind that not every upgrade will add value so you have to know what to upgrade. An experienced Realtor can give you some great advice when it comes to this.
At this point, you should go over the numbers to see if it makes financial sense to spend the extra money.
Increase your mortgage payment amount to end PMI
I have always believed this is a great thing to do regardless of PMI because it takes years off your mortgage. Even making small increases of $50 or $100 to your monthly mortgage payment can have a dramatic effect on your bottom line.
Obviously, the more you can pay at a time, the faster you will be to the point of getting rid of your PMI.
The best part is that you have the extra benefit of paying your house off much faster. Be sure to let your lender know that the extra payments are towards the principal only. Out of all the ways of ending PMI early, making extra mortgage payments towards principle gives you the most benefit.
Ending PMI early when you hit 80% equity
If you are in a position where you owe the bank 80 percent or less of your loan amount, then call your lender and ask for the insurance to be canceled. If you are in good standing with the lender, it shouldn’t be a problem. They will require you to submit your request in writing.
Requirements to cancel PMI
These are the requirements to cancel your PMI according to the Consumer Financial Protection Bureau
- Request to cancel PMI must be written.
- Your payment history must be in good standing.
- You may be required to show proof of other debts such as lines of credit
- A recent appraisal proving the home reaches the 80% threshold
Read the fine print on your mortgage
It’s smart to look over your mortgage docs with a fine-tooth comb so you are clear on terms and you should read every document your lender sends you. Track your payments to check how much you’ve paid off so far so you know where you stand.
You should also be watching your local real estate market to be aware of your home’s current value. In certain conditions, the value of your home can increase a lot faster than you would expect.
Consult with your Orlando Realtor to find out what your home’s current value is. You might be ready to eliminate your PMI faster than you think!
Be sure to use a Real Estate agent who knows how to value a home accurately. Unfortunately, many Realtors in Orlando fall short when it comes to determining a home’s value accurately. This is a skill that takes years of practice and experience.
My final thoughts on ending PMI early
You should now have a much better understanding of what PMI is and what a waste of money it is that you’re paying to your lender month after month. You should make a plan using the information in
