Private mortgage insurance (PMI) is a type of mortgage insurance that homeowners may need to purchase with a home loan. It is usually required if you make a down payment of less than 20% of the home’s purchase price on your home loan. PMI protects the lender against a potential default or foreclosure if a homeowner falls behind on their mortgage payments.
PMI can easily add several hundred dollars to your monthly mortgage payment. If your mortgage has PMI, there are a few ways you may be able to have it removed.
Increase Your Equity to at Least 20%
PMI can be removed when your home equity hits 20% of the home’s value. Once you attain 20% equity or have paid down your mortgage to the loan-to-value ratio of 80%, you can begin the process of working with your lender to remove PMI. Conventional loans remove your PMI automatically when you reach a 78% level, but if you wish to try to remove it prior to that time due to value increases or if you added value to the property or if you have a non-conventional loan, you would need to approach your lender to see what you would need to do to remove the PMI. Because this can take time, you also have the option of prepaying the principal to reduce the loan balance, such as applying a lump sum to your principal or making an extra mortgage payment each year.
For non-conventional loans you will most likely need to refinance to alleviate the PMI payment. The current value of your home and some other factors need to be considered to see if this is a viable option for you.
Refinance Your Mortgage
If your current home’s value is high enough that you can get a new mortgage with at least 20% equity, then refinancing may be worth exploring to remove PMI. Refinancing can be a good strategy when home prices have dramatically increased in value and interest rates are below the current interest rate on your loan. It may not be the best option if the current interest rate on your loan is less than today’s interest rates. One would need to weigh their options as to whether the cost of refinancing would be worth it to remove the PMI payment.
Ask for an Appraisal
In a hot real estate market where home prices have dramatically increased in recent years, the equity in your home could reach 20% ahead of your loan payment schedule. Your home could also have significantly increased in value from a renovation giving you more equity in the home. In these cases, you may want to invest in an appraisal to get the current market value of your home and see if the value has increased enough to remove PMI. Appraisals typically cost approximately $500.
If you are considering any of these ways to potentially remove PMI from your mortgage, contact your lender to ensure you are following their requirements.