PMI or Private Mortgage Insurance helps you secure a loan for more than 80% of the home’s purchase price. Because high loan-to-value loans carry a high risk of default, conventional lenders require you to purchase Private Mortgage Insurance. The insurance protects the lender should you default on your loan.
The good news is that you aren’t stuck with the insurance for the life of the loan. But, you have to know your options to get rid of it.
Get to an 80% LTV
One way to get rid of PMI is to wait until you owe less than 80% of the home’s value. At this point, you are able to ask the lender to cancel the insurance for you. Please note that this isn’t required by law. Lenders have the option to cancel the PMI or not at this point. Typically, they base it on the level of risk that you pose. They will look at:
- Your mortgage payment history
- Your credit score
- The current value of the home
This does require you pay for an appraisal. Make sure that you use a lender approved appraiser. The appraiser will look at the inside and outside of your home and write up a report comparing your home to the market value of the homes in the area that sold within the last six months.
Once you turn all documentation into the lender, they make a decision regarding the PMI. If you have made your payments on time, have good credit, and the home value shows that you owe less than 80% of the home’s value; you have a good chance of eliminating PMI without refinancing.
Get to a 78% LTV
If you can’t get approved to eliminate PMI at 80%, the law is on your side when you hit a 78% LTV. At this point, the lender has to cancel the PMI. You’ll know when you will hit a 78% LTV by looking at the Amortization Schedule provided to you at the closing. If you made the minimum payments as described in the Amortization Schedule, you’ll know the exact date the lender must cancel your PMI.
You don’t have to request PMI cancellation in writing if you wait until this point. The lender must automatically cancel it on your behalf.
Speeding up the Process
If you want to eliminate PMI faster, you can pay extra money towards the loan. There are a few ways that you can do this to help you lower your payment:
- Make an extra payment each month. Some borrowers pick a set amount, such as $100, and pay it towards the principal each month. This can knock a few months or so off the time it takes to hit that 80% LTV.
- Make an extra mortgage payment each year. You can either make an extra payment in full at one time or pay 1/12th of your mortgage payment in addition to your regular mortgage payment each month.
- Make a lump sum payment. You can also pay the principal down by making lump sum payments when you have the funds. Many borrowers apply annual bonuses or tax refunds to their principal balance to pay it down faster.
Refinancing is an Option Too
Of course, refinancing your loan is another option to eliminate PMI. It’s the most expensive option since you’ll have to pay closing costs again, but it can help you eliminate the insurance from your payment.
It’s up to you to determine if refinancing makes sense. In some cases, you can save money by grabbing a lower interest rate on top of the elimination of the Private Mortgage Insurance. The savings can be enough that your break-even point is short. Your break-even point occurs when you pay off the costs to close on the loan by adding up the monthly savings. You figure it out with the following calculation:
Total closing costs/Monthly savings = Months to break even
If you can get a break-even point that occurs within a couple of years, you could put yourself in a better financial position than if you waited by paying the principal balance down on its own.
PMI doesn’t last forever, even if you don’t do anything but wait until you hit 78% on the loan. If you want to speed things up, though, there are ways that you can eliminate PMI without refinancing. Explore all of your options to decide which one is right for you.