Strategies to Eliminate Private Mortgage Insurance (PMI) for Homeowners
Private Mortgage Insurance (PMI) is a type of insurance that many homeowners are required to pay if they purchase a home with less than a 20% down payment. PMI protects the lender in the event that the homeowner defaults on their mortgage. While it can enable buyers to purchase a home without saving a substantial down payment, PMI can add a significant amount to your monthly housing costs. Understanding how to eliminate this extra expense can save homeowners thousands of dollars over the life of their mortgage. Here are effective strategies to remove PMI from your mortgage payments.
Understanding PMI
PMI typically ranges from 0.5% to 1% of the entire loan amount annually. This means, for a $300,000 loan, the homeowner could be paying anywhere from $1,500 to $3,000 a year, or approximately an additional $125 to $250 per month, until PMI is removed.
Strategies for Eliminating PMI
1. Reach 20% Equity through Mortgage Payments: The Homeowners Protection Act mandates that lenders must cancel PMI automatically once you have amortized to a loan-to-value (LTV) ratio of 78%, based on the original property value and if your mortgage payments are current. However, you can request the removal of PMI when you reach an LTV ratio of 80% through your regular mortgage payments.
2. Make Extra Mortgage Payments: If you want to speed up the process of reaching 20% equity, you can make extra payments towards your mortgage principal. Before doing so, ensure that these additional payments are being applied directly to the principal and not just prepaying interest.
3. Home Appreciation: In markets with rising home values, your home may appreciate to a point where your LTV ratio drops below 80% sooner than expected. You can request an early cancellation of PMI by providing a new appraisal to the lender, showing that the increased property value brings your mortgage's LTV to 80% or lower.
4. Refinance to a New Mortgage: If mortgage rates have decreased or your financial situation has improved since you took out your mortgage, refinancing can be a good strategy to eliminate PMI. Refinancing might not only get rid of PMI but could also reduce your interest rate, lowering your monthly payments. However, ensure that the costs associated with refinancing are justified by the savings you'll achieve.
5. Home Improvements to Increase Value: Improving your home’s value through renovations or significant improvements can help in reaching an 80% LTV ratio more quickly. Strategic home improvements that increase market value — such as updating kitchens or bathrooms, adding additional rooms, or enhancing curb appeal — can substantially improve your home’s appraisal value.
What You Need to Remove PMI
When you believe you’ve reached an 80% LTV ratio and are eligible to request PMI cancellation, you will need to:
- Provide a written request to your lender asking to cancel PMI.
- Ensure your mortgage payments are current and have a good payment history.
- Provide documentation as required by your lender, such as a current appraisal. Some lenders might require an appraisal done by a professional they approve.
Conclusion
Eliminating PMI from your mortgage payment isn't just possible; it's a financially smart move that can save you money and increase your home's equity more rapidly. By understanding how PMI works and actively managing your mortgage payments and property value, you can effectively remove PMI and lessen your monthly financial burden. At Brick Mortgage, we are here to help guide you through this process and to optimize your homeownership finances effectively.