If you purchased your home with less than 20% down and you have a conventional loan, you pay PMI (Private Mortgage Insurance). The amount you pay is detailed on your mortgage statement. Chances are that it adds up to $100 or more per month.
Unfortunately, you will never see a return on this investment. The mortgage insurance premiums you pay are strictly to protect the lender. If you were to default on your loan, the lender would have protection against the loss.
The good news is that you can get rid of PMI sooner than you think. As long as your LTV (loan-to-value ratio) is less than 80%, you can eliminate this insurance premium from your monthly payment.
Pay Down your Mortgage to Get Rid of PMI
The bad news is that you will not be able to eliminate PMI payments right away. It really depends on how much you borrowed. If you were close, for example, 82% or something like that, then you can refinance quicker. Paying down 2% of your mortgage really isn’t that difficult. On the other hand, if you borrowed 90%, you have 10% of your principal to pay down before you can refinance out of PMI. Generally, on a 90% LTV loan, it takes around 7 years to pay the principal down enough to have less than an 80% LTV.
Of course, this is only the case if you pay the minimum payment every month. If you make extra payments towards your principal each month, you can reach the PMI cancellation point much quicker. Only you know how much extra you can afford to pay towards your mortgage each month, though. A good rule of thumb is to make 1/12th of a full mortgage payment each month as an extra payment. At the end of the year, you will have made an extra mortgage payment which cuts years off the term of your loan.This will help you move towards cancelling your PMI much faster.
Watch the Value of Your Property
There is also a way to get rid of PMI without extra payments. It’s called appreciation. If the value of your home increases naturally, you reap the benefits. Of course, you will need to make it official. The lender is not going to take your word for it that your home appreciated enough for you to get rid of PMI.
You will likely have to pay for a full appraisal so the lender can verify the new value of your home. If you combine your home’s appreciation with extra payments towards the principal of your loan, you have the perfect situation to eliminate PMI well before you were scheduled to get rid of it.
Consider the Costs of Refinancing to Cancel Private Mortgage Insurance
If everything works out for you regarding the value of your home and your outstanding principal balance, you can refinance to eliminate PMI. However, you should keep in mind that refinancing costs money. How much you pay to refinance could affect how much you save by getting rid of PMI.
Consider the normal costs of refinancing, including:
- Title fees
- Appraisal fees
- Closing costs
- Underwriting fees
- Processing
- Points charged by the lender
Once you know the full cost of refinancing, divide the cost by the monthly savings you will reap by eliminating PMI.
For example, let’s say it will cost you $3,500 to refinance and you will save $150 per month without PMI. It would take you 2 years to start seeing the benefit of refinancing. Of course, this situation can be better if you are able to lower your interest rate at the same time. This way your principal and interest payments are lower in addition to the savings on PMI. This means your break-even point would occur sooner than the 2-year mark we originally calculated.
If you want to boost your savings, a great way to use the money you save each month is to put it back towards the principal. In the above example, where you save $150 per month, you could put that $150 back towards the principal each month. This will help you pay the principal down faster and enhance your interest savings. This helps to speed up the break-even point and make refinancing to get rid of PMI the right choice.
FHA Mortgage Insurance is Different
If you have an FHA loan, keep in mind that this mortgage insurance works differently. You don’t get to eliminate this insurance no matter the LTV of your loan. FHA mortgage insurance is a lifelong insurance premium that you pay as long as you have the loan. The only way to eliminate FHA mortgage insurance is to refinance out of the FHA loan into a conventional loan. Again, though, you have to wait until your loan-to-value does not exceed 80%. You will have to go through the same steps as above to get your principal balance low enough to make it possible to refinance without paying PMI.
PMI may seem like a nuisance, but in reality, it helps you purchase a home. Whether you have a conventional or FHA loan, it helps you borrow the amount you need. If you take out an FHA loan, chances are you did not have a sizable down payment or you have sketchy credit. FHA loans are more forgiving than conventional loans, which means they give you a chance at being a homeowner. Instead of dreading the payments, see what you can do to pay your balance down. It is not hard to make extra payments each month or even one a year, which some people do who receive an annual bonus. Either way, watch the value of your home and jump at the chance to refinance when you hit below 80%.
PMI Is Removed Automatically by the Lender
The worst case scenario requires you to wait until you make your necessary payments to get rid of PMI. The lender has to remove it by law after you hit 78% LTV. You can see when this will occur by looking at your amortization table provided to you at the closing. Either way, there are several ways for you to eliminate PMI from your mortgage once and for all.
