If you put less than 20% down on a home and you use conventional financing, you will need PMI. You have two options for the coverage – borrower-paid or lender-paid. Borrower paid insurance is when you make monthly premium payments until you owe less than 80% of the home’s value. You are able to request PMI cancellation once you pay the loan’s balance down to below 80% or if the home appreciates, leaving with you a lower than 80% LTV.
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What about lender-paid insurance – at what point can you cancel it?
The bad news is that you can’t cancel it. Lender paid insurance means the lender pays your premiums for you. But they don’t do it for free. They charge you a higher interest rate in order to make up for the premiums that they pay. Since you can’t just cancel your interest rate, you are stuck with the rate as long as you have the loan.
Ways to Cancel Lender Paid PMI
If you do choose lender paid PMI, how do you get out of it? You can use one of the following methods:
- Pay the loan off in full – This option is obviously for the long-term, and for those that plan to stay in their home. Once you pay the loan off in full, you don’t owe any more interest. The lender can cancel the PMI policy and you own your home free and clear.
- Refinance the loan – Once you owe less than 80% of the home’s value, you can refinance your loan. This time borrow less than 80% and you won’t have to pay PMI or carry a higher interest rate to offset the lender paid PMI. This is the best option when you know you have good credit, a low debt ratio, and stable income/employment.
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Should You Choose Lender Paid PMI?
The bigger question here might be ‘should you choose lender paid PMI?’ Does it make sense to take the higher interest rate in exchange for the premiums being paid for you?
The answer is that it depends on the situation.
If you know you are only buying the home for the short-term, it might make sense. The lender pays the lump sum for the insurance. In exchange, you pay a higher interest rate, but only temporarily. If you know you will move in the next 2 years, you take the higher interest rate, but don’t waste money on PMI each month.
If you know you’ll live in the home for a long period of time, lender paid PMI might not make sense. The longer you keep the loan, the more interest you pay. If you opted to pay the PMI yourself, you may have been able to cancel it a few years down the road when you owed less than 80% of the home’s value. The only way out of it is to refinance, which may be a good option, but that costs you money too.
In the end, you can’t cancel lender paid PMI. But there are ways around it. Make sure you look at all of your options and look at the big picture. In other words, figure out how much the loan will cost you over its lifetime. Does it make sense to have the lender pay the PMI or should you just pay it and request cancellation at the first opportunity to do so? This is the question you must ask yourself.
