Say Goodbye to PMI: Simple Steps to Remove Private Mortgage Insurance from Your Home Loan and Save Money

If you’re a homeowner who put less than 20% down payment when buying your house, you may be paying for private mortgage insurance (PMI) as part of your monthly mortgage payment. PMI is designed to protect your lender from the risk of default and foreclosure, but it can add hundreds of dollars to your mortgage bill each year without benefiting you directly. However, once you build enough equity in your home or refinance your mortgage, you may be able to remove PMI and save money. In this article, we’ll explain how to remove PMI from your home loan and when it makes sense to do so.

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What is Private Mortgage Insurance (PMI)?

Private mortgage insurance (PMI) is a type of insurance that protects your lender in case you default on your mortgage payments. PMI is typically required when you put down less than 20% of the purchase price or appraised value of your home. The cost of PMI varies depending on your loan-to-value (LTV) ratio, credit score, and other factors, but it typically ranges from 0.3% to 1.5% of your original loan amount per year. For example, if you borrowed $200,000 and your PMI rate is 0.5%, you would pay $1,000 per year, or about $83 per month, for PMI until you reach a certain point.

When Can You Remove PMI from Your Home Loan?

There are several ways to remove PMI from your home loan, but the most common methods are through:

1. Automatic Termination

If you have a “fixed-rate” mortgage (where your interest rate and monthly payment stay the same for the life of the loan) and you’ve made enough payments to reduce your LTV ratio to 78% or less of the original value of your home, your lender is required by law to cancel your PMI automatically. You should receive a written notice from your lender when this happens, and your PMI payments should stop on the first day of the month following the date of the termination.

Note that this automatic termination rule only applies to loans originated after July 29, 1999, and doesn’t include “adjustable-rate” mortgages (where your interest rate and monthly payment can change over time) or “high-risk” loans (where you have a low credit score, a high debt-to-income ratio, or other risky factors).

2. Requested Cancellation

If you have a “fixed-rate” or “adjustable-rate” mortgage that doesn’t qualify for automatic termination, you can still request to cancel your PMI when you reach a certain LTV ratio or date, as long as you meet certain requirements. According to the Consumer Financial Protection Bureau (CFPB), you can request PMI cancellation when:

  • You’ve paid down the mortgage balance to 80% of the original value of the property or less.
  • You’ve owned the property for at least two years and have a good payment history with no late payments in the past 12 months.
  • You’ve provided evidence that the value of the property hasn’t declined below the original value due to market changes, such as a new appraisal or a broker price opinion (BPO).

To request PMI cancellation, you should contact your lender and provide them with the necessary documentation, such as your payment history, your LTV ratio, and your home value. Your lender may charge you a fee for the appraisal or BPO, but they can’t charge you for processing your cancellation request. If your lender agrees to cancel your PMI, they should refund any unearned premiums you’ve paid upfront and adjust your monthly payment accordingly.

3. Refinancing Your Mortgage

Another way to remove PMI from your home loan is to refinance your mortgage with a new lender. Refinancing involves taking out a new loan to pay off your existing loan, usually at a lower interest rate or with better terms. If you have built up enough equity in your home and your credit score has improved since you first bought your home, you may be able to qualify for a new loan without PMI.

However, refinancing your mortgage also comes with its own costs and risks, such as application fees, closing costs, appraisal fees, and prepayment penalties. You should weigh the potential savings from lower monthly payments and interest rates against the upfront costs and the time it takes to recoup them. You should also consider whether you plan to stay in your home for a long enough time to justify the refinancing. If you plan to sell your home soon, refinancing may not be the best option for you.

How to Calculate Your LTV Ratio

To determine whether you’re eligible to remove PMI from your home loan, you need to know your loan-to-value (LTV) ratio, which is the ratio of your outstanding loan balance to the appraised value or purchase price of your home. For example, if you borrowed $180,000 to buy a home that’s worth $200,000, your LTV ratio would be 90%. If you’ve paid down your loan balance to $160,000 and your home value has increased to $220,000, your LTV ratio would be 72.7%.

To calculate your LTV ratio, you can use this formula:

LTV Ratio = (Loan Balance / Appraised Value or Purchase Price) x 100%

For example, if your loan balance is $150,000 and your home value is $200,000, your LTV ratio would be:

LTV Ratio = ($150,000 / $200,000) x 100% = 75%

If your LTV ratio is less than 80%, you may be able to remove PMI from your home loan. However, if your LTV ratio is above 80%, you’ll need to take steps to reduce it, such as making extra principal payments, increasing your monthly payments, or waiting for your home value to appreciate.

TL;DR Removing private mortgage insurance (PMI) from your home loan can save you hundreds or even thousands of dollars per year, depending on your loan size and PMI rate. You can remove PMI from your home loan through automatic termination, requested cancellation, or refinancing your mortgage with a new lender. However, you should make sure you meet the eligibility criteria and weigh the costs and benefits of each option before making a decision. If you need help understanding your options for removing PMI from your home loan, you should consult a trusted financial advisor or mortgage professional.

Updated: May 2, 2023 at 10:41pm

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