ABC to get rid of PMI
Buying a home with less than a 20% down payment puts many people, who otherwise couldn’t afford it, into a home. But there is an often overlooked aspect of home ownership: private mortgage insurance (PMI). This is in addition to monthly payments when you pay less than the traditional down payment for a conventional loan.
Every month you pay for insurance, not for you or your home but to protect the lender. Essentially, your house payment increases when the PMI is applied. This amount is determined by the size of your loan and your down payment.
Do you want to cancel your PMI? Here are the ABCs:
Evaluation. Rising property values are always great news for homeowners. Appreciation is one of the main reasons you invested in a home. If you’ve owned your home for at least two years, you can take advantage of this increase in value to get rid of the PMI.
In a hot housing market like the one we find in northwest Arkansas, you may be able to cancel years before you initially thought possible. Be sure to write down any improvements you’ve made to your home, as they can also add value.
Review your PMI rules and talk to your lender before scheduling an appraisal, as some banks may require you to use pre-approved appraisers.
Bank refinancing. This is ideal if interest rates are lower than or equal to those when you took out your mortgage. In addition to lowering your monthly payment, you may find that the new balance is less than 80% of the home’s value, causing your PMI to be voided.
The downside is that fees and closing costs can wipe out your savings. Unfortunately, we may see rates increase soon, which makes this an option to take advantage of sooner rather than later.
You don’t have to refinance with your current mortgage lender. Look for the best deal and find a lender who understands your desire to end your PMI sooner.
Contact your lender. You can wait for your PMI to complete automatically. Mortgage managers are required to cancel your policy, free of charge, when certain criteria are met, such as paying off your principal balance. This balance must be less than 78% of the initial value of your home (defined as the lesser of the sale price or the appraisal price at the time your mortgage was granted). This is called the loan-to-value ratio, and you can find it by dividing the loan balance by the original purchase price.
If you do this calculation and find that you are close to reaching the 80% mark, contact your lender in writing and ask for the PMI to be cancelled. Emphasize that you have a good payment history (no 30-day late payment in the last 12 months or 60-day late payment in the last 24 months); that you have no other privileges (no second mortgage or home equity loan); and proof of the home’s current value (have it appraised by a licensed appraiser to show that its value has not diminished).
Request to cancel the PMI early if you have made additional payments that reduce the principal balance of your mortgage to 80% of the original value of your home. “Original value” means either the contract sale price or the appraised value of your home when you bought it, whichever is lower (or, if you refinanced, the appraised value when you bought it). refinancing). Your lender may ask you to provide proof (for example, an appraisal) that the value of your property has not fallen below the home’s original value. If the value of your home is lower than the original value, you may not be able to cancel the PMI.
Tina Sewell is a Loan Officer and Branch Manager at Rock Mortgage in Fayetteville. She has over two decades of mortgage lending experience. More information is available at RockMortgageLending.com. The opinions expressed are those of the author.