Private Mortgage Insurance
You may be required to have private mortgage insurance if you are putting down less than 20% as a downpayment. If you’ve bought a home without putting 20% down, your lender will probably need you to pay private mortgage insurance or PMI, each month. This is going to be a significant extra expense on top of your home loan payments.
The good news is that you can remove these private mortgage insurance payments and reduce your monthly expenses if you meet certain conditions. Let’s take a look at what these conditions are and how you can get rid of PMI.
What is PMI?
Private mortgage insurance protects the lender should you fail to keep up with your mortgage payments. If you default on the loan, the insurance makes sure the lender doesn’t lose out. With less than 20% invested in the home, you are considered high risk and more likely to get behind on your payments. The lender considers it a risk and more likely to enter foreclosure.
There isn’t any benefit to you from this insurance, however, it is only an added cost each month of perhaps $100 to $200. The buyer is the one who is paying the cost. The amount of the monthly insurance does not go towards the balance of the loan. The monthly amount of private mortgage insurance goes towards the insurance.
The amount you have to pay depends on your down payment, your credit score, and your lender.
How to Quit Paying Private Mortgage Insurance
Since you aren’t normally required to pay PMI when you have a 20% down payment, once you have the loan reduced to 80%, you can ask your lender to remove this private mortgage insurance. Depending on your situation and your down payment, it could take some time to pay the mortgage off to this level. By adding additional principal to your monthly mortgage payment, this will lower the loan balance. There are some other options, however.
If your home has increased in value, an appraisal might convince your lender that you no longer need to pay the insurance. You are reliant on your lender agreeing to this arrangement, and the appraisal has to value your home highly enough for this to work.
There are many factors that an appraiser will consider at an appraisal and some of those include the recent properties that have sold in the immediate area. Other factors which may improve the value of the home is if you have done recent upgrades such as a kitchen or a bathroom remodel.
Other factors that may influence an appraisal is the condition of the property. Be sure to maintain the home and address any deferred maintenance. It is apparent when properties are not being maintained.
Again, if your home has increased in value since your purchase, refinancing could make sense. You have to be careful with this, as you could find yourself in a worse position should the interest rate not be as competitive. But if you can get a better interest rate, and you only need a loan that is worth 80% of the value or less, this could be a great option. Having a lower interest rate and not having to pay PMI may allow you to pay your mortgage off early.
If your home hasn’t increased in value by itself, you could help the situation along by remodeling. There are ways to help youboost your home value. If you make the right improvements to your home, you could see a jump in its value. However, the expense involved in making the improvements could end up costing you more than the money you’ll save on the insurance payments. Having an updated kitchen with quartz countertops may improve the value of the home. A home that is freshly painted also looks appealing and appears fresh and clean.
Paying More Monthly
If you are able to make larger monthly payments on the loan, you will increase your equity in the home faster. This will get you to the point of not needing to pay insurance sooner and save you money in the long run.
This has the added benefit of paying off the mortgage faster as well, reducing your interest payments, and getting you out from under the mortgage quicker. If you have the extra money to help reduce your loan, it could make a very sound financial sense.
What Happens When You Reach 80 Percent?
You will need to contact your lender once your loan amount is down to 80%. This will need to be done in writing, and you need to have a good payment history with them. You could also be asked to provide evidence that you haven’t taken other loans out on the property, like equity loans or lines of credit. The lender might still require an appraisal to make sure the value is at least as much as it was when the loan was taken out.
If you don’t request to have the insurance removed at 80%, the lender is required to remove it automatically when the loan gets to 78%. If you take the option of paying more, however, you may find that this doesn’t happen without your requesting it. It will only be removed at 78% without you asking if you have made regular payments. So if you’ve been paying more, make sure you ask to have it canceled as soon as you reach the 80% threshold.
You should make sure you are keeping track of how much you have paid off so that you can stop the PMI as soon as possible. If you don’t, you will be paying more than you have to, and they won’t refund you. So it pays you to be attentive to your mortgage payments and carefully read any documents they send.
Be sure to have a conversation with your lender when you are obtaining the loan. If you know you are going to be paying for PMI, let the lender know that you have a plan to get rid of it as soon as possible. Stay in contact with the lender to let them know when you are getting closer to 80%. Adding extra principal each month is a great way to reduce the loan balance and help you to achieve your goal. As the home appreciates in value that will also help you reach 80%
About the Author
The above real estate article “How to Get Rid of Private Mortgage Insurance” was written by Sharon Paxson a top Newport Beach CA Realtor. Sharon has experience representing clients with their residential real estate needs in Coastal Orange County and the Newport Beach area since 2005. Reach out to her anytime to get your most pressing real estate questions answered.