How to Cancel PMI and Lower Your Monthly Mortgage Payment
Private mortgage insurance (PMI) is typically required for homeowners who put less than 20% down toward their home loan. In general, private mortgage insurance (PMI) is 0.5 – 1.5% of the total loan amount and is tacked onto the monthly mortgage payment. It can easily add a few hundred dollars to your mortgage payment every month and without bringing your balance down.
In a lot of situations, PMI requirements help new homeowners qualify for their first mortgage and make the switch from renting to homeownership sooner.
But wouldn’t it be great to get rid of those private mortgage insurance (PMI) payments once and for all and invest that money elsewhere? The good news is there are options to cancel your private mortgage insurance and help you save money.
Private Mortgage Insurance Isn’t All Bad
Most homeowners try to do whatever they can to avoid private mortgage insurance.
PMI increases your monthly mortgage payment without helping pay down the principal. Essentially it’s designed to protect the lender and not you, the borrower.
However, PMI is often an easy lever that helps first-time homebuyers become homeowners sooner. Lower down payments and lower restrictions allow first-time homebuyers to enter the housing market earlier, and paying an extra few hundred dollars each month is a small price to pay to become a homeowner.
For example, if your PMI is $250 per month ($3,000/year) and your home starts earning $20k per year in equity then it was a smart move toward building wealth.
Top 3 Ways to Eliminate PMI
There are three common ways to cancel private mortgage insurance:
Option 1: Wait until your PMI stops automatically
Private Mortgage Insurance automatically falls off your monthly mortgage payments once the loan balance reaches 78% or less of your home’s value. This is an automatic process that is based on your original purchase price and the appraisal at the time of your purchase. So when your loan-to-value ratio drops to 78% (or you reach the midway point in your amortized loan), the PMI payments will automatically drop off.
If your home has increased in value since you purchased it, this won’t necessarily be reflected automatically in your mortgage. In this case, it might be worth it to order another formal appraisal of your home to determine its current value. In some cases, you may reach the 78% loan-to-value ratio sooner than expected.
Option 2: Request to cancel your PMI
For conventional loans, which are non-government-backed home loans, homeowners can request PMI to be canceled at 80% loan-to-value, instead of waiting for 78% LTV.
Again, if the value of your home has risen in your area it might be worth it to talk with your mortgage advisor. Ask to find out if a new formal appraisal can save you money. In some cases, refinancing might be your best option so you can cancel PMI and also take advantage of lower interest rates, or better loan terms.
Option 3: Refinance from an FHA home loan to a conventional loan
If your current mortgage is a government-backed FHA home loan, then your mortgage insurance premium (MIP) is typically paid for the life of the loan (or 11 years depending on your down payment). For FHA loans, there is an initial payment toward MIP due at closing. Then the remaining premium is amortized over the life of the loan.
Again, this may have been a great option when you first secured your mortgage. But now it might be a good time to consider refinancing. If you’ve built more than 30% equity in your home before you reach 11 years, it’s worth considering. Refinancing can help you cancel the mortgage premium for good.
Talk to your mortgage advisor about refinancing to a conventional home loan. With a loan-to-value ratio of at least 80%, you can cancel your PMI for good.
A Word of Caution about Monthly PMI
For many loans, a portion of PMI is paid upfront at closing. So while it might be great to lower your mortgage payment, it’s possible that the cost of refinancing could outweigh the benefits.
The best option is to think about your long-term financial goals and talk with a mortgage advisor. Several home loan programs are available. A great mortgage advisor can build a custom option to help you meet your goals faster.
Working with an experienced mortgage broker makes all the difference when it comes to refinancing and canceling private mortgage insurance. If you’re thinking about getting rid of PMI, give us a call. We can help.