Getting Rid of Your Private Mortgage Insurance

Getting Rid of Your Private Mortgage Insurance

You may think that after you pay closing costs and the real estate agent, the only expense left is your monthly mortgage and maybe some new paint. However, if you made a small down payment, you might also be paying for private mortgage insurance, or PMI.

How to Avoid PMI
In some ways, PMI is beneficial: Without it, lenders wouldn’t be able to lend to buyers who can’t make the traditional 20 percent down payment. On the other hand, PMI can be expensive, and it’s based on your credit score — the worse your score, the higher your PMI.

To avoid PMI payments in the first place:

§  Find a less expensive home. The less expensive the home, the lower the down payment. If you still can’t afford a 20 percent down payment, get as close as you can to help pay off PMI more quickly.

§  Take out an 80-10-10 mortgage. In this arrangement, the buyer agrees to a mortgage for 80 percent of the home value, makes a down payment of 10 percent and takes out a second loan for the remaining 10 percent. These transactions are also known as piggyback mortgages.

How to Remove PMI From Your Mortgage
If you already have PMI on your mortgage, there are a few ways to remove it. First, you need to understand your home’s loan-to-value ratio (LTV), the difference between the amount of your loan and your home’s value. It’s easy to calculate your LTV: Simply divide your loan amount by the value. For example, if you borrow $135,000 for a house valued at $150,000, your LTV would be 0.9, or 90 percent.

Your LTV changes over time, and once it reaches 80 percent or lower, the PMI is no longer a requirement. The easiest way to reach that point is to keep paying your mortgage as planned, but that can take several years. Making extra payments will help you get there sooner.

An increase in your home’s value could also help you get rid of your PMI more quickly, whether it’s due to remodeling improvements or rising home values in your area. Consider getting an appraisal of your property if either of these causes your home’s loan-to-value ratio to drop significantly (remember, in this case, a decrease is a good thing).

If your LTV is below 80 percent, ask your lender to cancel your PMI, making sure to follow their guidelines. If your lender doesn’t approve your PMI cancellation in a timely manner, follow up by sending written complaints that restate your request. Send the letters by certified mail, and keep copies so that you have evidence in case you need to take court action.

Automatic PMI Termination
Under the Homeowner’s Protection Act, your mortgage lender is legally required to cancel your PMI coverage once you pay down your mortgage to 78 percent of the principal, as long as you are up-to-date on your payments and do not have an FHA loan. This act generally applies to homes purchased after July 29, 1999, but there are provisions for mortgages obtained before that date. Check the details to see if the act applies to your loan.

Tasha Schroeder wrote this article.