Private mortgage insurance (PMI) helped a record-high two million low-downpayment borrowers secure mortgage financing in 2020, a 53% jump from 2019, Housing Wire reports. It’s generally required if you’re unable to make a minimum down payment of 20% and ranges between 0.5%-2% of the loan total. Fortunately, however, you’re not locked into paying PMI (which can be hundreds of dollars each month) for the entire life of your loan and have several options for getting rid of it.
Wait for automatic cancellation
Under the Homeowners Protection Act, PMI should automatically be cancelled when your mortgage balance reaches 78% of your home’s original value — or when your loan-to-value ratio (LTV) reaches 78%. So, if your home’s worth $250,000, as soon as you pay the loan down to $195,000, PMI can be cancelled — even if the loan itself was for $210,000. Hence, PMI can usually be avoided altogether with a 20% down payment (bringing your LTV ratio to 80%). However, to qualify for this automatic cancellation, you must have a good payment history. It’s also important to note that if you have a poor credit score, lenders consider you high-risk and can set a different date for cancellation.
Refinance your mortgage
While refinancing your mortgage solely to cancel PMI isn’t advisable, it can be an added benefit if you’re already planning on refinancing. If your home value is then appraised below purchase price, you may be able to use your existing equity to reach the needed 78% or 80% LTV ratio (or, you may be able to pay a lump sum to achieve this goal). A refinance calculator can help determine whether refinancing is the right step for you. It’ll take into account current interest rates, an improved credit score and the type of mortgage loan you want — changing from FHA loans to conventional loans, for example.
When your LTV ratio reaches 80%, you’re able to request PMI cancellation in writing. In fact, cancelling at this earlier stage (rather than waiting for the 78% automatic cancellation) can result in significant savings. PMI ranges from between 0.5%-2% of your total mortgage; so, for example, a 1.25% PMI on a $300,000 loan equates to an extra $312.50 a month. Once your LTV ratio hits 80%, monthly payments will drop to $250 — which means requesting cancellation now rather than waiting to reach 78% will save considerable money. Your request, however, may not be granted if you have a late payment history, if your home value has dropped greatly, or if you’ve taken on a second mortgage that uses your first mortgage as collateral.
Although PMI can help you purchase a home within budget, the monthly payments can soon become an unneeded expense you no longer have to pay. By determining the right method for you, you can successfully get rid of your PMI as soon as possible and improve your financial situation.