How to Get Rid of PMI
As the Consumer Financial Protection Bureau reports, PMI is a type of mortgage insurance that borrowers are required to carry if they have a conventional loan and make a down payment of less than 20 percent. While the borrower pays for PMI by paying a monthly premium when they pay their monthly mortgage payment, the policy protects the lender. If the borrower stops repaying the loan, the insurance policy payout would go to the lender. Paying for PMI can add thousands of dollars to your annual expenses without providing any clear benefit. That makes learning how to get rid of PMI a priority for many homeowners. Fortunately, there are many ways to achieve this goal.
Wait for PMI to Cancel Automatically
When it comes to PMI, good things eventually come to those who wait. This is a result of the Homeowners Protection Act of 1998, which is also called the PMI Cancellation Act. As Experian notes, there are two different ways that your PMI can be canceled automatically:
- You’ve paid off 22 percent of your loan’s principal balance.
- You’ve reached the midpoint of your loan’s scheduled lifespan.
If you’re counting on automatic cancellation, make sure that you are current on your mortgage payments. While this is the easiest way to get rid of PMI, it’s the path that will have you making payments the longest. Other options may enable you to stop paying sooner, so they may offer greater savings.
Request a PMI Cancellation
While your mortgage servicers should stop charging you for PMI when your mortgage balance reaches 78 percent, you can request the cancellation when that balance hits 80 percent. While it may seem like a small difference, it could save you a substantial sum. How do you do it? Keep an eye on your loan-to-value ratio, or LTV. This is the loan balance divided by the original purchase price. When it nears 80 percent, get ready. Several months before you’ll hit the 80 percent mark, send a written letter to your mortgage servicer to start the process. According to NerdWallet, you’ll likely need a few things to make your case for early cancellation:
- Proof of value: You may have to prove that your home hasn’t lost value. This may require a new appraisal.
- Solid payment history: Payments made on time matter. Generally, the standard is no payments beyond 30 days late in the previous year and no payments beyond 60 days late in the previous two years.
- Freedom from liens: There can be no other liens on the property.
Arrange for a New Appraisal
Has your home increased in value? You may have made improvements. You may have chosen an up-and-coming neighborhood. You may have purchased a home, cared for it well over the years, and benefited from the passage of time. As Credible explains, a home that has increased in value may push your LTV above 80 percent. If you think you might be able to get rid of PMI because your home is worth more, the best approach is to reach out to your lender and ask about their procedure for canceling PMI via appreciation. You’ll likely need a new appraisal, but following their checklist reduces the chance that they’ll reject your efforts on a technicality.
Refinance to Wave Goodbye to PMI
When you refinance, you replace your original home loan with a new loan. In most scenarios, that new loan has better terms. As NextAdvisor points out, refinancing can be an effective way to escape PMI. However, there are fees involved in refinancing, so you’ll need to balance the potential savings against the costs.