Private Mortgage Insurance, also known as PMI, is something that many people don’t want to have (but can’t avoid) and they want to get rid of it as soon as possible, especially since it means that their monthly payment will go down and that they have a sizable amount paid off on their home.
Mortgage lenders will require you to pay PMI if you made a down payment of less than 20 percent, which is common for many homebuyers. This insurance is wrapped into the cost of your monthly mortgage payment.
What Is PMI?
The PMI reimburses the lender if you stop making payments on your home. Private lenders and mortgage companies take a risk loaning out large sums and the PMI is added insurance to help cover any financial loss on the lenders end should you default on your loan.
Legally, your mortgage lender is required to break down your payments to show the number of years and months it will take for you to reach the point of having adequate equity in your home to drop the Private Mortgage Insurance. This is beneficial for the buyer in many ways. It provides a timeline of payment expectations and a realistic goal for dropping the PMI. It also provides an estimated timeframe to begin the process of eliminating the PMI – so you don’t have to keep paying the PMI until the mortgage lender is required to drop it.
When Can You Drop PMI?
In order to remove PMI, you’ll need to meet this single requirement: You need to have at least 20 percent of equity in your house. Once you pay down the mortgage balance to 80 percent, you can request to remove the PMI. If the balance drops to 78 percent, the mortgage servicer has to eliminate PMI even if you did not submit a request.
How To Cancel PMI
To cancel your PMI, you’ll
- Need to request the cancellation in writing,
- Have a good payment history and not be behind on any payments when the request is made, and
- Not have an open HELOC, Home Equity Loan, or other lien against your property (and be able to provide a clean lien record).
Ways To Meet The 20% PMI Threshold
Here are a few things you can do to help get you one step closer to eliminating your PMI:
- Refinance your home value. Sometimes economy changes dramatically over time and your house today may have a greater value than when you originally signed for your loan. If the value increased enough, and you are able to refinance your loan, you may be eligible to eliminate your PMI.
- Request a new appraisal. If your home’s value has increased enough, your lender may use the new value to determine if you have 20% equity. Home appraisals usually $450 to $600; however, talk with your lender prior to obtaining an appraisal to determine if they will allow this.
- Pay more in your loan. Sounds a bit obvious, but even an amount as small as an extra $50 towards your principal every month can make quite a difference in achieving your 20% PMI threshold.