June 14, 2019
When you’re buying a house, there are a lot of things on your mind—and private mortgage insurance (PMI) may not be one of them. PMI is often required if you have a conventional loan and make a down payment of less than 20% since your lower down payment is seen as a riskier investment for the lender. As the Consumer Financial Protection Bureau reminds us, PMI isn’t designed to protect you. It’s designed to protect your lender in case you stop paying your loan.
What Does PMI Cost?
PMI is often rolled into your mortgage payment so you may not realize how much it’s costing you. Investopedia did the math: With PMI costing 0.5% to 1% of an entire loan amount annually and the median listing price of a home at $279,000 (according to Zillow as of February 28, 2019), you may be spending $233 a month on PMI.
Other PMI may require a one-time, upfront payment, and still others may require a mix of both upfront and monthly premiums. Check your loan terms if you’re unsure.
When Does PMI End?
If you had to get PMI when you purchased your house, then, by law, your lender had to tell you how long it would take until you no longer had to pay PMI. That’s usually when you have 20% or more equity in your home with good payment history. However, as Investopedia cautions, some lenders require you to have a PMI contract for a certain length of time and lenders don’t automatically cancel PMI for you until you have 22% equity.
When you hit the 20% mark, you’ll want to cancel. Your annual statement should have information on who to call to cancel, according to Bankrate. However, this may take months as many lenders need you to put the request in writing and require a formal appraisal of the house before you can cancel. In the meantime, you still have to pay for PMI.
That’s the bad news. The good news is that while PMI is hard to get rid of, it’s not impossible.
Before you rush to get a new appraisal, you’ll first want to check your lender’s terms. Some may require a couple of years of payments before they’ll eliminate PMI. Next, you’ll want to check a source like Zillow to get a rough idea of whether property values have increased. If your lender has no extenuating requirements and your property value has increased, then it may be worth getting a new appraisal.
As MortgageLoan.com explains, your original home appraisal may not reflect your current standing. For example, if your home was originally appraised at $200,000 and you still owe $180,000, then you’ve paid your balance down to 90%. However, if your home has increased in value and is worth $250,000, then the outstanding balance on your mortgage is under 80% of the value of your home (you’d be at 72%, in this case). At this point, you could request cancellation.
Home renovations, even smaller projects, can increase your home’s value. While refinishing your basement or adding a pool could certainly increase value, think updates like new kitchen cabinets and hardware, energy-efficient windows, a bathroom vanity, or even a fresh coat of paint. Remember: Everyone’s personal style is different, so opt for more neutral tones and styles.
When you boost your home’s value, have your home appraised again to see if you’re closer to the 20% equity mark.
If your loan-to-value ratio has hit 80% or it will soon, start making your case for early cancellation. Using a mortgage amortization calculator, keep close track of where your equity stands so you can write to your lender in advance. The process can take months, so you’ll want to get it started sooner rather than later.
According to NerdWallet, you’ll need three things to improve your chances for cancellation: a good payment history (no payments 30 days late in the past year or 60-day late payments in the past two years), no other liens (home equity loans or HELOCs, for example), and an appraisal, proving the home’s value.
Depending on when you purchased your home and how much it’s increased in value over the years, you may be sitting on a sizeable chunk of equity. Instead of accessing those funds via a traditional loan (which may prevent you from cancelling PMI), you can access a portion of your equity via a home equity investment.
Unlike a loan, a home equity investment gives you access to cash that you can use to pay down your mortgage in exchange for a share of the future value of your home. And, because it’s not a loan, you won’t be taking on more debt, interest, or monthly payments.
No matter which method (or methods) you use to pay down your mortgage, you must request cancellation in writing. You’ll also want to familiarize yourself with any exceptions to PMI rules to see if any apply to your situation. For example, The Balance Everyday notes that some states have laws for PMI on second homes while other rules may apply for Federal Housing Administration or Department of Veterans Affairs loans. Gather all the facts as they relate to your specific home loan and financial situation to determine which method for eliminating PMI makes the most sense.
Hometap Note: The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.
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