For many homeowners navigating a conventional mortgage with less than a 20 percent down payment, Private Mortgage Insurance (PMI) becomes an unavoidable monthly expense. Designed to protect lenders in case of default, PMI adds an extra cost to your mortgage payment. However, there are several proactive ways to eliminate this expense, potentially saving you a substantial amount over the life of your mortgage.
When Does PMI Go Away?
Guided by the Homeowners Protection Act of 1998, PMI removal is subject to specific guidelines. As per the Act, lenders are mandated to automatically terminate PMI once the borrower reaches a 78 percent loan-to-value (LTV) ratio. This means PMI should be lifted automatically when your mortgage principal is reduced to 78 percent of the original purchase price of your home. For example, if you bought a home for $300,000, PMI removal triggers when your mortgage principal falls to $234,000. Importantly, PMI costs decrease as you pay down your loan and are entirely removed upon reaching the required LTV ratio.
How to Get Rid of PMI
While PMI can inflate your monthly mortgage payment, consider these strategies to eliminate it:
Wait for Automatic or Final Termination
Under the Homeowners Protection Act, PMI is automatically terminated at a 78 percent LTV ratio or must be canceled at the midpoint of your loan’s amortization schedule, regardless of LTV ratio.
Request PMI Cancellation at 80 Percent Mortgage Balance
Proactively request PMI cancellation when your mortgage balance hits 80 percent of your home’s original value. Submit a written request to your lender, meeting specific requirements.
Pay Down Your Mortgage Early
Accelerate reaching 20 percent equity by making larger or additional mortgage payments, allowing you to request PMI cancellation sooner.
Refinance Your Mortgage
Consider refinancing if you’re close to the 20 percent equity mark, seeking a loan without PMI requirements.
Reappraise Your Home
In a thriving real estate market, a home’s value may increase, pushing your equity over 20 percent and qualifying you for PMI cancellation.
Home Improvements
Significant home improvements can boost its value, potentially reaching the required equity level for PMI cancellation.
Caution: Don’t Drain Your Assets
While eliminating PMI is financially beneficial, it’s crucial not to deplete savings or investment accounts. Maintaining a balance of liquid assets for emergencies is a wise financial strategy.
Know Your Rights Under Federal Law
Familiarize yourself with the Homeowners Protection Act, ensuring your right to eliminate PMI under specific conditions. Keep track of payments and home value. If you suspect non-compliance, file a complaint with the Consumer Financial Protection Bureau.
Conclusion
Paying off PMI is a savvy financial move, potentially saving thousands. Understand the rules, keep a vigilant eye on your mortgage balance and home value, and take proactive steps to remove this expense as soon as you’re eligible. The responsibility often lies with you, the homeowner, so stay informed and proactive in managing your mortgage costs. Explore more insights on our website.