Private mortgage insurance or PMI is the insurance you have on the mortgage on your house. If you have mortgage insurance, it means you put less than 20% down when you bought your home. PMI is one of the necessary evils of buying a home for many Americans. This article will describe how you can get rid of PMI in various ways. Refinancing into a no PMI loan is a prudent move financially in most instances because it can lower your monthly payments.
Your PMI will reimburse the lender if you ever default on your mortgage. This reduces the risk to the lender and allows more people to get home loans than otherwise would. PMI allows lenders to have lower credit score requirements and lower down payments. PMI is mandatory on all home loans that has an LTV of 80% or higher.
FHA financing also requires mortgage insurance, known as MIP or mortgage insurance premium. If you put less than 10% down, FHA mortgage insurance is required for life. Your only option to get rid of mortgage insurance in that case is to refinance to a conventional mortgage once you have 20% equity. In 2018, FHA does not offer a no PMI mortgage loan option.
Options to Dump PMI Forever
To take PMI off your mortgage, you will need to have an LTV of 78% or less. If you have an FHA loan, you need to refinance once you get to this point. You also will need to have the following characteristics to dump PMI:
- Make regular monthly payments on your mortgage with no late payments in the last year
- The balance on the loan should be 78% or less of your home’s current value
- You may not have a second mortgage on the property
- You need to have decent credit, generally 640 or higher
If you meet all of these factors, you may be able to cancel PMI. But the second one above is the most important. Your home value will change over the years, so you need to first make sure you have enough equity in the property. It may be necessary to conduct a new appraisal. This can cost $400 or $500.
Getting rid of your PMI payment can be done by doing one of the following:
- Refinancing out of your FHA loan into a conventional loan: Typically, FHA programs easier to qualify for and have very low-down payment and credit requirements. But you usually have to pay for mortgage insurance for the life of the loan. The only option with less than 10% down is to refinance. So, you will need to work to have your credit score and debt to income ratios at a good level so you can qualify for a conventional mortgage.
- Get a new appraisal: If you can show your lender that the value of the home has given you 20% or more equity, you may be able to dump PMI.
- Remodel the home: Doing home renovations will increase the market value of the property. Once you have the new renovations done, you should have a new appraisal done to determine if you have more than 20% equity.
- Pay down the LTV to less than 78%: You can pay down the mortgage faster than you are supposed to, so you can get the LTV down. Once you are below 78%, you can request the PMI be cancelled.
- Make additional mortgage payments to pay down your mortgage principal.
- Once you reach 78% LTV on a conventional mortgage, the lender is required to cancel PMI automatically. You should refer to your amortization schedule to determine if you are eligible to have PMI cancelled.
It also is easy to avoid PMI in the first place if you do one of the following:
- Make a 20% down payment: It is not always easy to save up that much money but putting down 20% will mean you never have to worry about PMI at all.
- 80/10/10 loan: You can get a loan that is 80% first mortgage, 10% second mortgage and 10% down payment. This will avoid the PMI payment problem. But the rates on the second mortgage will be higher than the first.
- Get a VA loan: If you are a veteran or in the military, you may qualify for a VA loan which has 100% financing, no PMI and very low interest rates.
- Get lender paid mortgage insurance: Some lenders may offer to pay your PMI in exchange for a slightly higher interest rate. This could be worth doing if you think you will not stay in the home more than a few years; paying a higher interest rate for many years may not be financially worth it.
Unfortunately, PMI is a necessary evil for many Americans, but it does not have to be forever. It is a good thing in some ways because it allows millions of people to buy a home who would not otherwise be able to. But there is no denying that PMI is an additional cost you would rather not pay each month. The best thing to do if you can be to pay 20% down and avoid the expense entirely. Otherwise, it is recommended to try one of the above no PMI loan options to get rid of the extra monthly payment as soon as you can.
References: The Basics of Private Mortgage Insurance. (n.d.). Retrieved from https://www.bankrate.com/finance/mortgages/the-basics-of-private-mortgage-insurance-pmi.aspx