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For many homebuyers, private mortgage insurance is an inevitable expense. PMI protects your lender in the event you default on your mortgage and typically increases your monthly mortgage payment.
The good news is, you don’t have to pay forever for PMI. You can Remove PMI from your home loan in various ways, such as refinancing. With mortgage rates historically low today, now might be a good time for you to set a lower rate and save hundreds of dollars by removing the PMI.
What is PMI
Private mortgage insurance, commonly known as PMI, is a type of insurance that protects your lender in the event that you cannot make your monthly payments. It is usually required with traditional loans when you make a down payment of less than 20%. You make monthly PMI payments until you reach 20% equity in your home. In this case, you can ask your lender to cancel the private mortgage insurance.
Other types of loans also have mortgage insurance. For example, FHA loans (administered by the Federal Housing Administration) collect a mortgage insurance premium, often called an MIP, that you pay when you take out your loan and every year thereafter for as long as you have the loan.
While PMI is designed to protect the lender, it indirectly helps home buyers. Often times, because of the security PMI offers, you can buy a home with as little as 3% off a traditional loan. About 40% of all mortgages through the government-sponsored Fannie Mae and Freddie Mac have private mortgage insurance. according to the Urban Institute.
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How much does PMI cost?
Private mortgage insurance is usually calculated as a percentage of the loan amount, which is usually between 0.5% and 1.5% per year. This corresponds to a PMI rate of $ 1,000 to $ 3,000 on a $ 200,000 mortgage. The specific cost of PMI depends on things like:
- The amount of your deposit
- Your credit history
- The type of credit you have chosen
- The term of your loan
Typically, you pay your PMI premium every month, with the cost included in the total amount you send to your lender. This is in addition to the principal and interest payments you made, as well as part of the taxes and fees. However, some lenders may offer a single upfront home mortgage insurance premium that you pay when you take out. In some cases, you may be offered an upfront premium along with monthly premiums.
How to remove PMI
When you are ready to complete the PMI payment on a traditional loan, there are several ways you can cancel it. The following methods only apply to private mortgage insurance for conventional loans. Different rules apply to mortgage insurance for government loans such as FHA loans.
Wait for PMI to automatically cancel
The law requires your lender to automatically terminate your personal mortgage insurance once you reach 22% equity in your home, based on your loan payment schedule and the home’s original value. To do this, you need to be aware of your payments.
Your PMI will also be automatically canceled once your credit reaches its midpoint – for example, after 15 years on a 30 year mortgage. This is true even if you have not yet reached the 22% home equity mark.
Request PMI cancellation
You can request PMI cancellation from your lender once you have reached 20% equity in your home through your monthly mortgage payment based on the original value of your home when you took the loan. Your lender needs to tell you when to do this.
You must submit your application in writing and have good payment history (all payments must be current). Your lender may ask you to prove that your home has not depreciated and may also ask that there are no liens or second mortgages on the property.
Get a new home valuation
Increasing home values can help you hit the magic mark of 20% faster. Since equity is the difference between what you owe on your home and what it is worth, any appreciation of the home will increase that spread. Your lender can take this into account and approve a request to cancel the PMI based on the current value of your home, but it will likely require a professional appraisal to verify the value of your home. Your new estimated value is included in the equity calculation.
Refinancing to remove PMI
You can also refinance your loan and get a new mortgage without a PMI. You must of course have 20% equity in your home. As part of a mortgage refinancing, your lender will usually order a new appraisal to help you take advantage of the increase in the value of your home. Just keep in mind that if you are planning a payout refinance, any money you take out of the house will decrease the total amount of your equity.
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Can You Avoid PMI?
While private mortgage insurance can be of great help to borrowers when purchasing a home, there are ways to Avoid paying PMI in full. Here are a few:
Put it down 20% or more
The easiest way to avoid PMI is to pay a deposit of 20% or more on your home. Easier said than done, especially when buying your first home. But you can factor this in your budget, save more money, or buy a cheaper home if you want to avoid PMI.
Mortgages without PMI
Some lenders offer low down payment mortgages with no PMI. This can be part of a first home buyer program or a special program with its own qualification requirements. It’s worth asking about it. Military or veterans can also consider a VA loan that does not include mortgage insurance, although you will usually have to pay an upfront fee upon completion.
PMI only applies to conventional loans. Government-supported loans follow their own rules. If you are a military service member or a veteran, you may want to consider a VA loan that does not require mortgage insurance. FHA loans and USDA loans require mortgage insurance that cannot be canceled. You must refinance your loan to another guy to get out of it.
Know your PMI rights
Most of the rules governing personal mortgage insurance were established by the 1998 Federal Homeowner Protection Act. They apply to all loans granted on or after July 29, 1999.
The law gives homeowners rights, including the automatic PMI cancellation mentioned above. Lenders are also required to notify you of the PMI cancellation when the mortgage is closed and every year thereafter. They will also need to provide you with a phone number to call to inquire about PMI cancellation. If your PMI is canceled, they must send you this in writing and let you know that you no longer owe rewards.
Before agreeing to a conventional mortgage, ask your loan officer for a detailed explanation of the personal mortgage insurance requirements, how it is paid for, and what other rules apply. If you think your lender is not following the PMI removal rules, you can file a complaint with the Federal Office of Consumer Protection.
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