What is Mortgage Insurance and How/When to Eliminate it

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Private mortgage insurance is a type of insurance that mortgage providers use to reduce their risk of loss on mortgages with a low down payment. Lenders usually require it on any mortgage for more than 80% of the value of a home. PMI doesn’t cover the entire amount of the home loan. If you were to default and proceed to foreclosure, the proceeds of the sale of the home would cover a portion of the bank’s losses, and PMI would make up the rest. Here is an example, if a buyer puts only 5% down on a home, the lender will require an amount of PMI that reduces the mortgage to less than 80% of the home’s market value.

How Much Does PMI Cost

Most people want to avoid paying PMI because it can be fairly expensive. For example, on a $190,000 home loan with a 3.9% APR and a home value of $200,000, a borrower with a decent credit score could expect to pay about $138 per month in PMI. That’s $1,656 per year. Obviously, the more quickly you can remove that payment, the better.

Ways to Eliminate PMI

There are several ways you can eliminate PMI. The first way is to pay down your mortgage. Take the price you paid for your home and multiply it by 80%. Then work diligently to pay your mortgage down to that amount. You may also have to meet some other conditions to have your PMI removed. You have to request the removal of your PMI in writing. You have to have a good payment history and be current on your monthly payments. Your lender might also require you to prove that there are no secondary or junior liens on your home (such as a second mortgage).

Pay Down the Mortgage to the Midpoint of the Original Term

Paying down your loan to the midpoint of the original term of your loan generally automatically eliminates your PMI payments. Typically the lender is required to remove PMI when at least half of the mortgage term has elapsed, even if the value of the loan is still over 80% of your home’s value. So, on a 30-year home loan, PMI must be removed after 15 years.

Refinance the Mortgage

Another way to drop your PMI is to refinance your loan, especially If you are planning to take advantage of lower interest rates. This will work if your new mortgage is for 80% or less of your home’s current appraised value. You’ll probably need an appraisal to be sure your new mortgage will be for 80% or less of your home’s current value.

If you are currently paying PMI and want to get rid it of it, the best thing you can do is to talk to your local home mortgage representative to find out your options. They will guide you through the process and answer all of your questions. If we can be of service, please give us a call today.

 

Note: Opinions expressed are solely my own and do not express the views of my employer