When and How You Can Cancel Private Mortgage Insurance

Private Mortgage Insurance, or PMI, is an extra cost that many homeowners pay when they have a smaller down payment on their home. While it helps lenders reduce risks, it can feel like an unnecessary expense for homeowners. The good news is that PMI doesn’t last forever, and there are ways to cancel it once certain conditions are met. This guide will help you understand when and how you can remove PMI, saving you money and reducing your monthly mortgage payments.

What is PMI?

Private Mortgage Insurance (PMI) is insurance that protects lenders if a borrower fails to make their mortgage payments. It’s usually required for conventional loans when the down payment is less than 20% of the home’s purchase price. While PMI increases your monthly mortgage costs, it also allows you to qualify for a loan with a smaller down payment.

Why is PMI required?

The intention of PMI is specific – insurance for the lender in case a debtor fails to pay for his house credit. When using this type of down payment, there are many risks involved for the lender since they have minimum stake on the property. In case the borrower defaults on his payment and faces foreclosure the lender may not be cleared fully if the market value of the property has dropped. PMI ensures this risk is minimized and assists the lenders to give mortgages that require little down payments.

How much does PMI cost?

PMI can be eliminated after several years, but the cost of PMI depends on credit score, the amount borrowed and down payment size.The time it takes to build up the reserve on average can be as low as 0.5-1% of the aggregate loan amount per year. For instance, if you have a mortgage amount of $200,000 where the PMI is charged at 0.8% you have to part with an additional $1,600 in a year or $133 each month towards payment for PMI. It is also significant to understand that this amount is additional on the monthly mortgage, fee, or cost and property taxes.

Conditions for Canceling PMI

While PMI may be required at the beginning of your mortgage, it doesn’t have to last for the entire duration. There are certain conditions that must be met in order to cancel PMI, and they vary depending on the type of loan you have. Here are some common scenarios where PMI can be canceled:

Automatic Cancellation

The HPA states that PMI must be automatically canceled once the borrower reaches 22% equity in their home based on the original purchase price or appraised value at the time of purchase, whichever is lower. This means if you purchased your home for $300,000 with a down payment of $30,000, your loan balance would need to reach $234,000 for PMI to be automatically canceled. Keep in mind, this also only applies if you have been making your mortgage payments on time and haven’t taken out any additional liens on the property.

Request Cancellation

If you want to cancel PMI before reaching 22% equity, you can request it from your lender once you have at least 20% equity in your home. However, the HPA also requires that you have a good payment history and may require an appraisal to determine the current value of your home.

Refinancing

Another way to get rid of PMI is by refinancing your mortgage. If the value of your home has increased, or you have paid down your mortgage enough to reach 20% equity, you may be able to refinance and get a new loan without PMI. Keep in mind that refinancing comes with its own costs and fees, so it’s important to weigh the pros and cons before deciding if it's the right option for you.

Legal Protections for Homeowners

The Homeowners Protection Act (HPA) is a federal law that provides certain protections for homeowners with PMI. These include:

• The right to receive an annual statement from your lender showing when you can request cancellation of PMI.
• The right to receive written notice from your lender once you reach 20% equity and are eligible to request cancellation.
• The right to have PMI automatically canceled once you reach 22% equity, as long as you meet the requirements mentioned above.
• The right to challenge the lender's appraisal if you believe it overvalues your home and prevents you from canceling PMI.

It’s important to understand these legal protections and utilize them if needed to cancel PMI.

Tips to Manage PMI Costs

Paying PMI can be a burden on your monthly budget, but there are ways to manage and potentially reduce this cost:

• Improve your credit score: A higher credit score may qualify you for a lower PMI rate. So, it’s important to maintain good credit habits such as paying bills on time and keeping credit card balances low.
• Make extra payments towards your mortgage: By making extra payments towards your principal balance, you can reach 20% equity faster and request cancellation of PMI.
• Consider an 80/10/10 loan: This loan strategy involves securing two mortgages: one covering 80% of the home's value, the other 10%, while you provide a 10% down payment. By doing so, you can potentially eliminate the need for private mortgage insurance (PMI). However, it's crucial to carefully evaluate the risks and benefits of this approach with a trusted financial advisor.

Alternatives to Get Rid of PMI

If you’re unable to cancel PMI through the options mentioned above, there are still alternatives to consider:

• Pay for a new appraisal: If you believe your home has increased in value and you have at least 20% equity, paying for a new appraisal may help prove that you no longer need PMI.
• Wait for automatic cancellation: Once you reach 22% equity, PMI should be automatically canceled. Keep track of your loan balance and make sure to request cancellation if needed.

Final Thoughts

Private Mortgage Insurance may seem like an unnecessary expense, but it can also make homeownership more accessible for those with smaller down payments. However, there are ways to cancel PMI once certain conditions are met, such as reaching 20% equity or refinancing. It’s important to be aware of these options and take advantage of them when possible to save money on your monthly mortgage payments. Remember to also utilize the legal protections provided by the HPA if needed.