If you have a mortgage, you may be paying for private mortgage insurance (PMI) every month. PMI is a type of insurance that protects the lender in case you default on your loan. But PMI can also be a costly and unnecessary expense for you, especially if you have built enough equity in your home. In this blog post, we will explain what PMI is, how it works, and how you can cancel it to save money on your monthly payments.
What is PMI and how does it work?
PMI stands for private mortgage insurance, which is a type of insurance that lenders require for borrowers who make a down payment of less than 20% of the home’s value. It protects the lender from losing money if the borrower stops making payments and the home goes into foreclosure.
PMI is usually added to your monthly mortgage payment as a separate fee. The amount of PMI you pay depends on several factors, such as:
– The size of your loan
– The type of your loan (conventional, FHA, VA, etc.)
– The term of your loan (15 years, 30 years, etc.)
– The loan-to-value ratio (LTV), which is the percentage of your home’s value that you owe on your loan
– The credit score of the borrower
The average cost of PMI ranges from 0.5% to 1.5% of your loan amount per year. For example, if you have a $200,000 loan with a 1% PMI rate, you would pay $2,000 per year or $166 per month for PMI.
Why should you cancel PMI?
Canceling PMI can have several benefits for you as a homeowner. Here are some of the reasons why you should consider canceling PMI as soon as possible:
– Save money: The most obvious benefit of canceling PMI is that you can save money on your monthly payments and reduce the total cost of your loan over time. Depending on how much PMI you pay and how long you have left on your loan, canceling PMI can save you thousands of dollars in the long run.
– Build equity faster: By canceling PMI, you can also build equity in your home faster and increase your net worth. Equity is the difference between your home’s value and your loan balance, and it represents the amount of money you would get if you sold your home. By paying less for PMI and more towards your principal, you can increase your equity and have more financial security and flexibility.
– Access other options: Canceling PMI can also open up other options for you as a homeowner, such as refinancing to a better loan, taking out a home equity loan or line of credit, or selling your home for a profit. Having more equity in your home can make it easier for you to qualify for these options and get better terms and rates.
Can You Cancel PMI?
Yes, it is possible to remove PMI earlier than expected, for which you must have met specific criteria.
As per the PMI cancelation act, there are four ways at present your PMI can be terminated, and we have discussed them below.
1. Wait For Your PMI To End
This is the obvious method of canceling your PMI. Well, what happens is that as soon as the balance of your principal loan reaches 78% of the original value of the home, your PMI shall automatically be terminated.
Moreover, if you have reached the halfway stage of your term of repayment then the PMI will begin to drop no matter how much your principal balance is.
2. Request Cancelation Of PMI
The other way is by requesting the cancelation of your PMI on your own but that is possible only after once your loan balance has reached at least 80% of the original value of the home provided that the date you are expected to reach this stage is listed on the disclosure form of your PMI or is given by the lender.
Well, since, you can pay more than the scheduled payments, it is up to you if you can manage to pay the balance to 80%. So, to drop your PMI, you will need to speed up your payments.
3. Refinance To Cancel PMI
Another way in which you can get rid of your PMI is by refinancing into a new conventional loan. If there is at least 20% you have in home equity, then your PMI payments on the new loan can be avoided.
All you have to do is make sure that your costs of refinancing are not outweighing the benefits you are receiving because you are going to have to pay closing costs for refinancing and will also need to provide the documentation of your income, assets, credit, and your home’s value.
4. On Increase Of Your Home’s Value
If the value of your home has increased enough to make you reach at least 20% equity, then you can request a new appraisal after putting in a cancelation request. Just make sure that your principal balance has been paid down to at least 80%.
For this, all you will need to do is prove that the value of your home has increased for which you need to get a home appraisal prepared.
How To Cancel PMI?
The process that you will need to go through for the cancelation of your PMI completely depends upon which type of insurance you have. Let us check out all of them so that you can go with the method that fits you right.
Also, read How To Cancel GEICO Insurance
How To Cancel Borrower PMI?
To cancel your Borrower Paid Mortgage Insurance, you will have to build at least 20% equity. Then you have to contact your lender and ask them to cancel your PMI. Once you have made the request, soon after, ensure the confirmation of its cancelation by asking them for a mortgage statement along with your current payment information.
How To Cancel Lender PMI And Mortgage Insurance Premiums?
If you have an LPMI or a MIP, then the only way of removing your payments is by refinancing. For this, you need to have made a down payment of less than 10%.
Then, you have to reach at least 20% equity in your home to be eligible for refinancing. Then, start comparing the lenders to ensure that you won’t be at loss. Once you have decided, then you can simply apply for a refinance and wait for the clearance of underwriting and appraisals and acknowledge the closing disclosure of your insurance.
Cancel PMI- FAQs
Do I Have To Wait 2 Years To Cancel PMI?
In some loan cases, there is a seasoning requirement due to which you need to wait for about 2 years to cancel your PMI and refinance again. You must take the help of the agent to know more about it and whether you will be able to cancel PMI when you want or will have to wait.
Can You Get PMI Removed Early?
If you have made some additional payments and your mortgage’s principal balance is now reduced to 80 percent of that of its original value then you can of course ask to remove your PMI early, prior to the provided time.
Can I Cancel PMI If My Home Value Increases?
If you are able to make your payments as per schedule and on time then your Home value can increase and you can get about 20% equity in your home. If this happens, you can finally make a request to cancel the PMI.
Canceling PMI can have several benefits for homeowners, such as saving money, building equity faster, and accessing other options. Homeowners should consider canceling PMI as soon as possible to take advantage of these benefits and improve their financial situation.