It’s no secret that owning real estate is one of the most effective methods that you can take advantage of to increase your net worth. But, it will take longer than necessary to build equity in your home if you are responsible for paying private mortgage insurance (PMI). Fortunately, there are a handful of ways that you can get out of this obligation. Not sure where to start? Don’t worry, we’ve got you covered. Let’s take a look at everything you need to know about PMI cancellation.
What Is Private Mortgage Insurance (and Why Do I Need It)?
As the name implies, private mortgage insurance Is directly related to the loan that you use to pay for your home. Unlike most other types of insurance, it’s designed to protect the lender instead of you.
Put simply, buyers who put less than 20% down on their home (under most circumstances) will need to purchase private mortgage insurance. This will ensure that the lender is able to get their money back if the buyer is unable to make payments in the future.
The most common way that homeowners handle this obligation is through paying a monthly premium that’s added to their mortgage payment, allowing them to seamlessly pay for their coverage.
How Can I Get Out of Paying It?
Unfortunately, the money you paid toward private mortgage insurance is essentially money that you’re throwing away since you don’t directly benefit from it. So, it’s in your best interest to illuminate the need for PMI as soon as possible.
Although this may seem difficult, the methods you can use are fairly straightforward and are worth pursuing for most homeowners.
Let’s explore three of the most notable.
One of the simplest ways to get rid of PMI is to refinance your mortgage. This is especially true given the current real estate climate, where mortgage rates are historically low.
If your new mortgage balance is less than 80% of the home’s total value, you would likely be able to eliminate your need for private mortgage insurance. This is more or less the equivalent of you having originally put down 20% of the value of the home during the buying process.
Refinancing your home also comes with the added benefit of securing more favorable loan terms, which could drastically reduce your monthly mortgage payment.
Of course, this process doesn’t occur free of charge. So, you will want to ensure that the closing costs that you incur on your refinancing don’t outweigh the savings that you would make on your PMI.
Additionally, most mortgage providers require that borrowers wait at least 24 months before they refinance, which makes this option unavailable to newer homeowners.
This process works similarly to refinancing, but it doesn’t involve renegotiating the terms of your mortgage loan.
If you feel (or know) that your home has risen in value in recent years, it’s worth hiring a professional appraiser in order to determine the new value of your home. Depending on how much money you put down when you purchased the home, it may only take a small increase in value to eliminate your need for PMI.
Reappraisal is often something you should pursue if you have made additions or renovations to your home. Under the right circumstances, building an inground pool in your backyard could cause your home’s value to skyrocket. The same could be said about adding an extra bedroom (or two), upgrading your kitchen hardware, etc.
Although reappraisals are relatively cheap (often $500-$600), it’s best to research whether or not your property has gained value before moving forward with this process.
A great way to start is by looking at the values of homes similar to yours in your area. You can then compare those numbers to what you originally paid for your house to help you get an idea of whether or not your home’s value has increased over time.
3. Automatic Termination Through Your Lender
Under certain circumstances, your mortgage lender is legally required to cancel your private mortgage insurance. This can occur in two scenarios:
- Your mortgage balance reaches 78% of the price at which you originally purchased your home
- Your loan period has reached its halfway point
To elaborate on the second point, let’s assume that you took out a mortgage for a 30 year period. After 15 years, your lender would be required to cancel your private mortgage insurance.
It’s important to know, though, that this only occurs if you have been consistently making your payments on time and do not have an outstanding balance. For example, if you missed an entire payment 12 months ago and then continued to make payments afterward without repaying the amount that you missed, this could affect your ability to cancel your PMI.
This method of cancellation is most appropriate for homeowners who are nearing either of the above two milestones. Rather than refinancing your loan or going through the process of re-appraisal, they can simply throw extra cash at their mortgage payment to reach the 78% threshold.
Or, they can wait until their loan term has reached its halfway point.
Understanding PMI Cancellation Can Seem Difficult
But it doesn’t have to be.
With the above details about PMI cancellation in mind, you’ll be well on your way toward making the decision that’s best for you and your future.
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