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Private Mortgage Insurance (PMI) is a type of insurance that protects lenders if a borrower defaults on their loan. Unfortunately, PMI is required on conventional loans if your down payment is less than 20% — but that doesn’t mean you have to pay it for your entire loan term. There are ways to get rid of PMI, even if you’re still paying off your mortgage.
The amount of PMI you need to pay is calculated as a percentage of the outstanding principal of your loan amount — anywhere from .25 to 2% of your loan’s balance annually, which can run into the thousands.
The PMI premium can be paid several ways:
There are five types of PMI:
Private Mortgage Insurance (PMI) is insurance that protects lenders from higher risk conventional loans. If you default on your loan, PMI ensures the lender is paid back. If you’re a home buyer with a down payment of less than 20%, unfortunately, you can expect to pay PMI.
The first option for retiring your PMI is to let it run out. As a homeowner, you’re required to pay PMI while your loan’s principal balance is greater than 78% of your home’s purchase price. However, your lender is legally required to terminate PMI when the balance of your loan reaches 78% of the purchase price of your home and you have no missed payments.
While lenders are required to drop your PMI once you reach the 78% milestone, it can sometimes get overlooked. As such, we suggest a follow-up with your lender to make sure they remove your PMI on time. Set up a calendar reminder so you don’t forget.
To find your PMI expiration date, refer to your Loan Estimate and Closing Disclosure paperwork. If you can’t find it, contact your lender.
Instead of waiting for your PMI to retire automatically, you can contact your lender and ask them to cancel your PMI. You can do this once you pay down your loan’s principal to below 78%of your home’s value.
To request cancellation with your lender, you must:
Additionally, you may need to get a new appraisal to prove that the home’s value hasn’t dipped below its original value. If it has, your lender may deny cancellation.
Refinancing can be a good strategy to eliminate your PMI, especially when interest rates are low and your home has increased in value. As long as you’ll owe less than 78% on the home’s purchase price with a new refinance loan, you can get rid of PMI.
Along with making it possible to ditch PMI, other benefits of refinancing include:
Keep in mind that refinancing can run into the thousands of dollars, so you want to make sure the savings outweigh the costs. You can do this by calculating your refinance break-even point.
To get your refinance break-even point, divide the cost of the refinance by the monthly savings. For example, if the refinance costs $4000 and the monthly savings from the refinance is $250, the break-even point on the refinance is 16 months ($4000/$250=16). After the 16-month mark, you can start putting the monthly savings in your pocket.
If your home significantly increased in value since you bought it, the increased equity could help you get rid of PMI. Since PMI is based on the home’s original purchase price, you’ll pay PMI until the home’s equity falls below 20%. If you can show your lender a reappraisal that shows the equity increase to 20% or more, you could be on the way to eliminating your PMI.
Some lenders offer mortgage products that don’t require PMI, for example:
To find lenders that will waive PMI when your down payment is under 20%, you can compare lenders or contact the mortgage company directly and ask.
As a borrower, you have rights under the Homeowners Protection Act and the PMI Cancellation Act. Under the federal Homeowners Protection Act (HPA), you have the right to remove PMI from your home loan in two ways:
If for any reason you end up hitting a wall with your lender when trying to cancel PMI, call the Consumer Financial Protection Bureau at 855-411-2372 to better understand your rights or to file a complaint.
PMI insurance can add thousands of dollars to the cost of owning your home. But the good news is you don’t need to pay it forever. Get rid of PMI through automatic termination, refinancing, requesting its removal if you already have it or choosing a loan that doesn’t require it.
To find a lender that can help you out, visit our mortgage finder.
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