For a conventional mortgage, paying any less than 20% down will very likely result in private mortgage insurance (PMI) becoming a requirement for your loan to close. PMI ultimately exists to protect the lender from a borrower defaulting on a mortgage in a particularly precarious situation, where the home may be worth very near the total mortgage amount. The risk is assumed by the insurance provider, who would pay a portion of the balance to the lender in the event that there is a default.
As a buyer, PMI is a relatively expensive proposition when it comes to your loan, and that money will not ultimately be recovered when you pay down the loan. It is effectively a benefit that you will never see as the mortgagee.
How to Remove PMI From Your Mortgage
The need for PMI is calculated by a simple ratio. It is known as the LTV or Loan-to-Value ratio. Speaking simply, PMI goes away when the LTV ratio is 80% or less. This means that the loan balance is equal to 80% of the home’s value.
For example, the 80% LTV ratio for a $200,000 mortgage is $160,000. When you pay down the mortgage principle to below $160,000, then PMI can be removed from the loan. You can determine the 20% threshold by multiplying your current home value by 80% or .8. If you current balance is below this number, then you’re below the 80% LTV level.
You can also take the current principal balance on your mortgage and divide it by the original loan amount.
Remember the 20% down mark you hear so much about for conventional mortgages? PMI is the reasoning that this number is so prolific and important.
Your mortgage lender is legally obligated to remove PMI at 78%, but obviously you should seek to remove it the moment you become eligible. The good news is that there are some tips that can help you remove PMI a bit sooner.
● Obtain a new appraisal. This tactic has taken on new significance in the current real estate market because of the recent increases in home value. You should always speak with your lender first to understand their policy, but completing a new appraisal may yield a home that has increased in value and surpassed the all-important 80% LTV threshold. Remember to always weigh your options, as an appraisal can cost up to $500. Quite often, however, the appraisal can be much cheaper than several more years of paying PMI. Do the math and speak with your lender to get started.
● Remodel your home. “V” stands for value when it comes to your home. If you can figure out a way to help increase the value of your home, then you can increase the “V” component in the LTV ratio. Strategically increasing the value of your home by remodeling and upgrading the right areas can yield new equity. And while this method may be riskier than other options, the right home can see some fairly significant gains.
● Prepay your mortgage payment. While some mortgages may charge a prepayment penalty, the good news is that most do not. This is perhaps the most costly strategy to remove PMI, but it will still ultimately save you money. If you prepay the mortgage down sooner, then you can more quickly reach that 80% threshold. The additional good news is that you’ll save some interest costs along the way.
● Refinance your home. The LTV ratio may be influenced by a simple refinance of your home. You may need a new appraisal, and this appraisal may very well yield a more expensive home. You can always pay a down payment or add additional cash to help move the needle. Refinancing your home can be a great way to reduce your interest costs and remove PMI at the same time.
Be Aware of Your Rights When It Comes To PMI
All mortgage servicers must provide a statement that shows whom to contact to obtain information about cancelling PMI on an annual basis. In addition, your lender is legally obligated to inform you at closing as to how many years and months it will take to pay down your mortgage and remove PMI.
The Final Countdown
There are a few other considerations for removing PMI. Your mortgage payments need to be current. Falling behind in payments suggests to the lender that you might be a default risk. A lender that feels this way may be less inclined to work with you.
You must also provide a written request to remove PMI. Calling your lender or even going for an in-office visit will not be enough. Make sure to review your statements and determine where the written request must be submitted. You may be asked to prove that there are no other liens on the property such as a home equity line of credit or home equity loan.
While PMI is a great tool that allows buyers to purchase a little bit more home than they could otherwise, monitoring your mortgage when it comes to PMI can really save you money.
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