PMI Removal
Not all homebuyers can afford the ideal 20% down payment on their property purchase. As a result, their loan-to-value ratio will be above 80%, making their mortgage profile a higher risk for the loan servicers. To protect their investment in the property, lenders require buyers in this situation to pay for private mortgage insurance (PMI).
However, your home's equity will grow over time, giving you a few opportunities to eliminate PMI. It's important to know your options when it comes to PMI removal. Understanding how to remove PMI from your mortgage payments can save you thousands of dollars over the life of your loan and significantly decrease your monthly housing expenses.
What is PMI?
PMI stands for "private mortgage insurance." It's an added insurance policy for homeowners who put less than 20% down on their mortgage. It's meant to protect the loan servicer should the homeowners be unable to make their mortgage payments.
PMI is not to be confused with homeowners insurance, which protects your property in the event of damage to your home, property, personal belongings, and other assets.
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Types of PMI
Those who require a private mortgage insurance premium often have several different options available. Each has its own pros and cons, and some have different requirements for eliminating PMI.
Borrower-paid PMI
When people talk about private mortgage insurance, they usually mean borrower-paid PMI. This type of PMI adds premiums to your monthly mortgage payment. These payments will terminate automatically when your mortgage balance reaches 78%. You can also request to cancel lender-paid PMI once you reach 20% equity in your home.
Lender-paid PMI
With lender-paid PMI, you technically still have to pay for the coverage. However, the lender-paid mortgage insurance payments won't appear on your mortgage statement. You'll instead be required to pay a higher interest rate on the loan. You also won't have the option to request PMI removal the same way you can with a borrower-paid PMI. Your only real option to get rid of PMI will be to refinance.
Single-premium PMI
Single-premium PMI bundles the entire PMI cost into one premium. Depending on the loan terms, you can pay this total amount at the closing or add it to the loan for a higher balance. Also, if you sell your property before you would have stopped paying PMI in monthly payments you'd technically lose out on that additional money you paid upfront.
Split-premium PMI
A split-premium PMI arrangement allows you to pay a larger upfront fee that covers a portion of the overall PMI cost. You then pay the remainder in your monthly mortgage payments. This option combines features from both single-premium and borrower-paid PMI. If done correctly, you won't need to pay as much upfront as you would for single-premium PMI, and can have lower monthly payments. It's a popular option for those with a relatively high debt-to-income ratio because it enables you to reduce your potential mortgage payment so as not to exceed the DTI threshold.
When can I remove my Private Mortgage Insurance?
For most homeowners, PMI is an additional monthly expense that becomes an unnecessary burden as equity grows in their home. When looking into canceling PMI, you should first have a good payment history. You should also note that some mortgage servicers like Fannie Mae and Freddie Mac create their own guidelines for PMI cancellation. So it might be a good idea to verify if they have any additional requirements when trying to get rid of PMI.
Automatic cancellation
Your first option is to wait for an automatic cancellation from your lender. Mortgage lenders must automatically cancel PMI on the day your loan balance is scheduled to reach 78% of the original value of your property. This is typically at the halfway point of the loan's term.
Request PMI cancellation when you reach 20% equity
Once you reach 20% equity in your home, you can request to remove the PMI early. This can be achieved through a combination of paying down your mortgage balance and potentially seeing an increase in your home's value over time.
Pay down your principal balance early
If you're not quite at 20% equity in your home, you can work toward that goal faster by making additional payments to your mortgage's principal. By reducing your principal balance ahead of the typical PMI cancellation schedule, you decrease your mortgage's loan-to-value ratio.
Refinance your mortgage
By refinancing, you have the opportunity to replace your current mortgage with a new one, often at a lower interest rate and with more favorable terms. If your home's value has increased since you first purchased it, or if you've paid down a significant portion of your mortgage, you may now have enough equity to qualify for a loan without PMI. Refinancing basically allows you to reset your loan terms and potentially eliminate the need for PMI. However, it's essential to carefully weigh the costs associated with refinancing against the potential savings to ensure it's the right decision for your financial situation.
Reappraise your home
As the real estate market fluctuates over time, rising property values can help with PMI cancellation. Getting a new appraisal can show your mortgage lender that the new value is higher than the home's purchase price, which can result in a lower LTV ratio, making you eligible to cancel PMI. While there are costs associated with hiring an appraiser, the potential savings from eliminating PMI can far outweigh these expenses in the long run. Fortunately for you, there are high-quality appraisal companies that alleviate some of the stress about appraisal expenses. For example, Appreeze offers a streamlined order, inspecition, and payment process making the process a bit easier.
Expand or renovate your home to increase its value
Investing in upgrades such as adding additional square footage, updating kitchens and bathrooms, enhancing curb appeal, or improving energy efficiency can potentially raise your home's appraised value. If you plan to renovate to remove PMI payments, you'll need to carefully consider the costs and potential return on investment of any home improvement projects before proceeding. You'll want to ensure that they align with your budget and financial goals and will ultimately be worth it.
PMI removal appraisal process
A PMI removal appraisal involves hiring a certified appraiser or appraisal company to assess the current value of your home with the specific goal of eliminating PMI. This appraisal is typically initiated by the homeowner once they believe their home's value has appreciated sufficiently to meet the requirements for PMI cancellation.
The appraiser will conduct a thorough inspection of the property, taking into account factors such as recent sales of comparable homes in the area, any upgrades or improvements made to the property, and the overall condition of the home. If the appraised value comes in high enough to lower the loan-to-value ratio below the 80% threshold, you can then petition your lender to remove the PMI requirement from your mortgage.
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Unlike other appraisers, Appreeze provides a streamlined process. They're appraisals are conducted virtually, using remote, GPS-authenticated inspections right through your smartphone. They combine the use of new technology with professional appraisal experience to provide efficient appraisals.
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Frequently asked questions
Is removing PMI a good idea?
Eliminating mortgage insurance can be beneficial as it reduces your monthly mortgage payments. However, before beginning the PMI removal process, it’s important to consider your budget. You’ll have to factor in appraisal fees, refinancing fees, renovation costs and more.
Can I remove PMI if my home value increases?
If the value of your home increases, you might have enough home equity to be eligible to request PMI removal as long as it’s loan-to-value ratio is below the 80%.
Can I get my PMI removed early?
You are entitled to request the cancellation of PMI from your servicer once the principal balance of your mortgage is projected to reach 80% of your home's original value. The initial eligible request date should be indicated on your PMI disclosure form, which should have been provided to you along with your mortgage.
How long does it take to get 20 equity in your home?
Most homeowners typically need five to 10 years to accumulate 15% to 20% of home equity. This timeline can vary depending on if you decide to try to accelerate the process by renovating, paying additional mortgage principal, etc.
