How to Get Rid of PMI
When you first sign up for a mortgage, you might notice that the lender is charging you an extra fee each month for private mortgage insurance, or PMI. This insurance protects the lender against the risk that you’ll default on your loan. Mortgage lenders generally require PMI for anyone who buys a house with a down payment that is less than 20 percent.
The cost of PMI varies based on your credit score and the size of your down payment and can be anywhere from 0.3 percent to 1.5 percent of your original loan balance per year. For instance, if you borrowed $180,000 to buy your home with PMI of 0.5 percent, your PMI costs you an extra $900 per year, or $75 per month.
This isn’t a trivial sum – but fortunately, you won’t be paying it forever. PMI automatically disappears once your home equity gets high enough, and there are things you can do to eliminate it even faster.
Pay Down the Mortgage
The easiest way to get PMI out of your life is just to keep paying down your mortgage. By law, the lender must cancel your PMI automatically once your loan-to-value ratio reaches 78 percent. (Your loan-to-value ratio, or LTV, is the amount you owe on your mortgage as a percentage of the home’s original appraised value.)
You can ask the lender to drop your PMI a bit sooner, when your LTV falls to 80 percent. To do this, you must submit a request in writing. Most lenders will only cancel your PMI if you are up-to-date on your payments, have had no late payments in the past year, and have no other liens on the house, such as home equity loan. Some lenders also require an appraisal, as discussed below, to prove that your home hasn’t fallen in value since you bought it.
Prepay on Your Loan
If you don’t want to wait for your LTV to drop to 80 percent on its own, you can get there faster by prepaying your loan. There are several ways to do this:
- Put a lump sum toward the mortgage principal. You can do this when you get a cash windfall, such as a tax refund or an inheritance.
- Add a flat amount, such as $50, to each monthly mortgage payment.
- Arrange to pay biweekly. If you split your monthly mortgage payment in half and pay this sum every two weeks, you’ll end up making the equivalent of one extra payment each year.
However, check with your mortgage company before using any of these methods. Some lenders only accept extra payments at specific times, and others charge a prepayment penalty for early payments. When you make an extra payment, make sure to include a note saying this money should go toward the mortgage principal, rather than toward your next monthly payment.
If property values in your area have risen, your LTV could hit 80 percent sooner because the home has increased in value. At that point, you can refinance into a new home loan without PMI. Most lenders allow this only if you’ve had your home for at least two years.
However, there are a couple of potential problems to watch out for with refinancing your home. First, if interest rates have risen since you bought it, your new monthly payment could be higher than the one you have now. And second, refinancing involves steep one-time fees, which might outweigh the amount you save by canceling your PMI.
Get a New Appraisal
If your home has risen in value, you might be able to drop your PMI without needing to refinance. Some lenders will allow you to get a new appraisal and substitute your home’s new value for the original price when calculating your LTV.
To get rid of PMI based on a new appraisal, you need to have owned the house for at least two years and have an LTV of 75 percent or lower. If you’ve lived in the house five years or longer, you only need an 80 percent LTV.
A new appraisal is cheaper than refinancing your loan, but it can still cost anywhere from $300 to $600. However, some lenders will accept a broker price opinion in place of an appraisal. This takes less time to get and only costs about half as much.
Increase Your Home’s Value
If property values in your area haven’t risen, you can boost your home’s value yourself by remodeling. After adding a room or redoing the kitchen, you can ask your lender to recalculate your LTV using the home’s new value.
Of course, remodeling costs money, but it also offers benefits beyond just eliminating PMI. You get to enjoy the new space while you’re living in the house, and you’ll get more money for it when you’re ready to sell. Experts say the remodeling projects that give you the best bang for your buck are ones that increase your home’s curb appeal, such as upgrading your siding or front door.
Keep in mind that most of the ways to eliminate PMI cost some money up front. Even paying down your mortgage costs money if you could get a better return investing that money somewhere else.
To make sure it’s really worth it, calculate how long you expect to be paying PMI and how much it will cost you in total. You might find that it’s cheaper just to wait for your LTV to reach 78 percent than to take the steps needed to drop PMI sooner.
Ethos Lending is a new type of mortgage lender. We use technology to keep our operational costs as low as possible. From closing costs to interest rates, we have made it our mission to make the process of buying a home more affordable. Get in touch with one of our mortgage specialists to learn more.