Many Americans buy a home with less than a 20% down payment. Being able to put down less money to enjoy the American Dream opens up home ownership to millions of people who may not have been otherwise able to buy. But buying with a lower down payment usually means paying for monthly private mortgage insurance or PMI.
PMI protects the lender if you default on the mortgage. The risk of default is higher on a property with down payment less than 20%. PMI typically costs many home buyers $100 or $200 per month and is a percentage of the price of the home.
Home owners often are irritated that they must pay for PMI as it is an extra expense on top of the mortgage principal, interest, taxes and home owner’s insurance. But your loan servicer may not tell you that you do not need to pay for PMI in most cases forever. Because they do not say anything, some homeowners may pay for PMI far longer than they need to. It is possible you could pay thousands of dollars to the lender when you did not need to.
How to Get PMI Cancelled
As a homeowner, it is important to know when you can have PMI cancelled. When you have reached 20% equity in the property through your payments and/or appreciation, you have a legal right to have PMI cancelled. You can check your loan documents for the amortization schedule to see at what point during the loan that you have 20% equity.
It also is possible you could reach 20% equity faster based upon home appreciation. If you think that your home has appreciated markedly, you may need to pay for a current appraisal to show the lender what the current value of the home is.
If you think you have 20% equity in your home, you need to request in writing that PMI be cancelled. You should provide your evidence in the letter that you have 20% equity. The usual proof required is a state certified appraisal; the URAR 1004 report is what is required for single family homes.
Most mortgage lenders will require you to fill out a form to request the PMI be removed. Keep in mind that you must demonstrate a good payment history for PMI to be cancelled. If you have missed any payments in the past 12 months, the lender may want you to make another year of timely payments before they cancel the policy. But some lenders may want to see that you have more than 20% equity before they will cancel the mortgage insurance. Some of them may want to see 25% equity. However, it is important to know that the mortgage lender is required under federal law to cancel your mortgage insurance once you have 22% equity, or 78% loan to value. Many loan servicers may not want, you to know this and they probably will not tell you. So, if you are getting close to this point in your loan, be aware that they must cancel the policy at that point if you have been making on time payments.
Tips for Cancelling PMI
First, make sure that you contact the proper mortgage lender. The original lender often sells the loan to another company. If you have any questions, talk to the lending officer who first handled your loan; he or she can tell you who to contact to request PMI be cancelled.
Second, the Homeowners Protection Act mandates that servicing lenders make homeowners aware of the PMI they are paying for and how to have it cancelled. Any questions about this, you should check your loan paperwork. As noted above, the lender is required to provide an amortization schedule for the entire length of the loan. That document will tell you when you will reach 20% equity. But you could reach that point faster because of appreciation.
Third, another option to cancel PMI is to refinance into a no-PMI mortgage. If you have 20% equity, the other lender will not require PMI. This could be an option if you want to refinance into a lower rate or even pull out cash. You could have to wait to refinance the loan for at least two years to get out of PMI. Check with your lender.
Fourth, you can get rid of PMI faster if you overpay on your loan; even paying $50 extra per month can make a substantial difference over time.
Fifth, remodeling the home to increase the value can help you to cancel PMI faster. Experts recommend upgrading a kitchen or bathroom or replacing the windows to boost the value substantially.
The key takeaway is that PMI is an extra expense that is worth getting rid of as soon as you can. Follow our tips above so you can stop paying for it as soon as possible.