What is PMI and why should you get rid of it? Private mortgage insurance is a kind of insurance you may be required to buy if you’re applying for a conventional home loan and you can’t shoulder a down payment of at least 20% on a house. But this insurance policy doesn’t protect you as a homeowner: It protects the mortgage lender if you don’t make your mortgage payments.
Obtaining any type of loan, such as an FHA loan, VA loan, or conventional loan, requires the lender to run your credit report to view your credit card utilization and gauge your ability to make the monthly payment.
But that doesn’t mean you have to keep paying PMI for the life of the mortgage.
How To Get Rid of PMI
“It’s an insurance premium for the lender to protect them because when people put down less than 20%, they’re more likely when times get tough to get foreclosed on,” Clark says.
The Consumer Financial Protection Bureau (CFPB) says federal law provides rights to remove PMI payments for many mortgages:
“You have the right to request that your servicer cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80% of the original value of your home. This date should have been given to you in writing on a PMI disclosure form when you received your mortgage. If you can’t find the disclosure form, contact your servicer.”
Even if you don’t ask to cancel PMI, your mortgage lender must terminate it on the date when your principal balance is scheduled to reach 78% of the original value of your home, according to the CFPB. To know more about your rights regarding PMI, learn all about the Homeowners Protection Act.
If you pay only the minimum of your monthly mortgage payment, it can take quite a few years to eliminate PMI on a conventional loan.
How To Get Rid of PMI Early
Here’s the good news: Some lenders may let you pay for a new appraisal and drop PMI if the appraisal shows at least 20% home equity.
Erin Lantz, vice president of mortgages at the online real estate website Zillow, provided Clark.com with more details:
“For those homeowners with certain mortgage products that are currently paying private mortgage insurance premiums as a result of a smaller down payment, it can make a lot of sense to have their home re-appraised to find out if they’ve built up enough equity to take the PMI requirement off their accounts.
“This could result in some incremental monthly savings they could use to reinvest in their home, save for a down payment on another, larger home, or pay down debt, among other things. Paying for another appraisal and/or refinancing can bring some additional costs of their own, but the monthly savings that come from it could be more than enough to offset those costs.”
Enter your address on Zillow’s website to get an estimate of your home’s current appraised value, which can help you determine if paying for a new appraisal is a good idea.
You also want to call your lender to ask about options for removing PMI and to request a list of approved appraisers.
“Know your area. If you’ve seen big increases in the homes around you, then it may well be worth you spending the several hundred dollars to have the appraisal done and dump PMI,” Clark says.
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