Saying goodbye to PMI
Is it time to get rid of your private mortgage insurance?
Lenders generally require PMI when homebuyers are not able to make a cash down payment of 20%. It’s a way to protect the lender in case of forclosure. According to Realtor.com, PMI costs range from .20% to 1.50% of the balance on the loan each year, based on factors such as credit score, loan terms and the amount of the down payment.
When it comes to getting rid of these payments, 80 is the magic number. When the balance on the mortgage goes down to at least 80% of the original value of your home, PMI is no longer needed, provided it was not a FHA loan. The only way to get rid of the FHA mortgage insurance is to refinance into a conventional loan.
The original value is either the contract sales price or the appraised value when you bought it. If you’ve refinanced, then it’s the appraised value at the time you refinanced. To figure out if you’ve reached the magical number, look at your loan-to-value (LTV) ratio. To calculate your LTV, divide your loan amount by the value of your home.
Under the federal Homeowners Protection Act, there are two ways to remove PMI from your home loan: (1) ask your financial institution to cancel PMI or (2) wait until it’s automatically done by your financial institution when your principal balance reaches 78% by your financial institution.
In addition, the Consumer Financial Protection Bureau states the following conditions must also be met:
- Your request must be in writing.
- You must have a good payment history and be current on your payments.
- Your lender may need you to certify there are no other liens (like a second mortgage) on your home.
- Your lender can also ask you to provide proof that the value of your property has not dropped below the value of the home when you first bought it.
Don’t have time to wait to reach 80%? You can try renovating your home to increase the value of your home or try to pay your mortgage down earlier.
