PMI is insurance you pay when you put less than 20% down on a home. Luckily, it’s not insurance you pay forever. There are ways you can eliminate it. The most common way is refinancing. It’s not your only option though. We discuss your options below.
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What is PMI?
First, let’s look at PMI. Its full name is Private Mortgage Insurance. You pay it if you put down less than 20% when you bought the home. It’s an insurance policy for the lender if you default. It doesn’t cover the entire mortgage, just a portion of it. Even though the insurance protects the lender, though, you pay for it. It can be costly, depending on your credit score and loan-to-value ratio.
When Can You Cancel It?
In general, you can cancel PMI when you owe less than 80% of the home’s value. You must then request the cancelation in writing.
Ways to Eliminate PMI
Once you have PMI, you don’t have to pay it forever. You can get rid of it. Refinancing may be the easiest way, but it’s not the only. Consider these options when trying to get rid of it on your loan:
Make extra payments
You pay PMI because you owe more than 80% of the value of the home. If you pay the principal down low enough, you don’t owe it anymore. You likely know the value of your home. Take that number and multiply it by 80%. This is the maximum amount of your principal balance allowed without PMI. Now work on paying the principal down to get to that point. You can make extra payments to help you get to that point.
Pay for a new appraisal
If you can prove your home’s value increased, you can eliminate PMI. This requires paying for an appraisal, though. It may cost you between $300-$500. Before you take this step, make sure the lender approves. You can’t use just any appraiser; it must be a lender-approved appraiser. Talking to a professional about your home’s value ahead of time can help too. Just because you heard your neighbor’s house appreciated, doesn’t mean yours did too. Before you waste money, let someone agree with your thoughts.
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Some lenders also require a timely payment history over the last 2 years before they’ll get rid of PMI. Even if you can prove your value increased, if you are in default, they won’t let go of the PMI. Before you waste money on the appraisal, make sure your payment history is in good standing.
Wait until you hit 80% LTV
The slowest way to get rid of PMI without refinancing is by making your regular payments. You can check your amortization schedule for the exact date you’ll hit 80% LTV. At that point, you can request the cancellation of PMI in writing. Again, your account must be in good standing. If you are not current on your payments, the lender won’t cancel PMI – it’s too risky. In most cases, you can cancel according to the date on your closing documents. In rare cases, a lender may require you to order a new appraisal to confirm that you owe less than 80% of the value of the property.
Is Refinancing to Get Out of PMI Bad?
Refinancing has several benefits. You can use it to get rid of PMI. It may also help you lower your interest rate. It’s like killing 2 birds with 1 stone. Of course, refinancing comes with its downsides. The biggest downside is the closing costs. Most lenders charge them, even if you use the same lender. You may have some room for negotiation though. If you can’t pay the closing costs, ask about a zero-closing cost loan. The lender will charge you a slightly higher interest rate but won’t charge any closing fees. If there’s enough of a saving on your interest rate, this could help.
Another downside of refinancing your loan is you restart your term. Let’s say you took out a 30-year loan. You’ve made 5 years of payments when you refinance. If you take out another 30-year term, you lost those 5 years. If you can afford the shorter term, go for it. This way you don’t start back at the beginning. This saves you interest in the long run. The longer you borrow money for, the more interest you pay.
Lender Overlays
Keep in mind, your lender has the final say in canceling your PMI. If you are a risky borrower, they can make you keep paying the insurance. The most common reason is when borrowers miss payments. Keep a consistent history of on-time payments in order to avoid this. However, even your property can make you ineligible for removing PMI. If you live in any type of high-risk property, your lender could make a case that they still want the PMI. Lastly, borrowers who turn their home into a rental often get stuck with the PMI. Rental properties are much riskier for lenders than owner-occupied properties.
The bottom line is that you can probably get rid of PMI. There are several ways for you to go about it. The easiest is to pay your principal down to the point that you owe less than 80% of the value. If you must refinance, make sure you shop around. You don’t have to keep the same lender. You are going to pay costs on the loan no matter where you go. It makes sense to shop around with different lenders. Find the best deal and the lowest interest rate. This way you can save on interest and on PMI.
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