Jane Dotson
Private mortgage insurance (PMI) is a type of insurance that protects the mortgage lender if the borrower defaults on their loan repayments. It is typically required when the borrower makes a down payment of less than 20% on a conventional loan. While lenders get peace of mind for taking on additional risk, PMI also benefits those looking to buy or refinance a home because they can get mortgages with down payments or existing equity lower than 20%. There are several ways to get rid of PMI, including refinancing to a conventional loan, getting a reappraisal, or paying down your mortgage faster. This article will discuss the different methods for removing PMI on a refinance and provide information on eligibility and costs.
| Characteristics | Values |
|---|---|
| How to avoid mortgage insurance | Reach 20% equity in your home |
| Request PMI cancellation when your mortgage balance reaches 80% of the home's original value | |
| Refinance into a conventional loan | |
| Get a new appraisal | |
| Wait for automatic cancellation | |
| Pay down your mortgage faster | |
| Get a no-PMI loan | |
| Get a second mortgage | |
| Get a VA or USDA loan | |
| Pay a lump sum at closing |
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What You'll Learn
Request PMI cancellation when your mortgage balance reaches 80%
Private mortgage insurance (PMI) is a policy you must buy to protect your lender in the event that you default on your mortgage. You can typically request its removal once you reach 20% equity. However, federal law requires mortgage lenders to automatically cancel PMI when the balance of the mortgage drops to 78% of the home's purchase price, or when the loan term is at its halfway point, whichever comes first.
You can also request PMI cancellation when your mortgage balance reaches 80% of the home's purchase price. This is known as the PMI cancellation window. To do this, you must make a written request to your lender or servicer. You must also be current on your mortgage payments, with a good payment history.
To estimate the amount your mortgage balance needs to reach to be eligible for PMI cancellation, multiply your home's purchase price by 0.80. You can also calculate your loan-to-original value (LTOV) ratio by dividing your current unpaid principal balance by the purchase price of your home or the appraised value at closing, whichever is less. If your LTOV ratio falls below 80%, you may submit a written request to cancel your PMI.
You can reach the 80% threshold faster by making extra payments toward your principal balance. Check with your lender to see if this is allowed on your loan. You can also pay down your mortgage faster by making biweekly payments or an additional payment each year, or by paying one lump sum at any time.
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Refinance your FHA loan into a conventional loan
Refinancing an FHA loan into a conventional loan is a viable option for homeowners who want to avoid paying mortgage insurance premiums (MIP), which are required for all FHA loans. By switching to a conventional loan, you'll be subject to private mortgage insurance (PMI) instead, which is easier to remove.
To qualify for a conventional refinance, you'll generally need a minimum credit score of 620 and a maximum debt-to-income ratio of 45%. It's important to note that refinancing can be time-consuming and involves additional closing costs. However, with a conventional loan, you may be able to benefit from a lower interest rate and eliminate mortgage insurance payments altogether if you have at least 20% equity in your home.
One of the main advantages of refinancing from an FHA to a conventional loan is the ability to shorten your loan term. For example, switching from a 30-year loan to a 15-year mortgage can result in significant savings on interest charges. Additionally, conventional refinance rates tend to be lower than FHA refinance rates, so you may be able to secure a more favourable interest rate.
Another benefit of refinancing is the opportunity to tap into your home equity. With a conventional cash-out refinance, you can borrow up to 80% of your home's value without paying mortgage insurance. This option allows you to convert your home equity into cash, providing financial flexibility.
Before making the decision to refinance, it's essential to carefully consider your financial situation and seek professional advice. Utilise tools such as a mortgage refinance calculator to understand the potential costs and savings associated with refinancing. Additionally, be mindful of the closing costs associated with refinancing, as they can be substantial, especially on large mortgages.
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Get a new appraisal to verify your home's new market value
If you're looking to refinance your mortgage and avoid paying private mortgage insurance (PMI), getting a new appraisal to verify your home's market value is a crucial step. Here's why this matters and what you need to know:
When you refinance your mortgage, your lender will typically require a professional appraisal to determine the current market value of your home. This appraisal serves as a protective measure for the lender, ensuring they don't lend you more money than your property is worth. By getting a new appraisal, you can establish an up-to-date value for your home, which is essential for setting your new loan amount and determining if PMI is necessary.
Understanding the Appraisal Process
The appraisal process involves hiring a licensed or certified professional to assess your home's value. This appraiser will conduct a thorough evaluation of your property, examining its condition, amenities, and dimensions. They will also consider comparable properties in your local market to determine how much your home could sell for if listed. The result of this process will impact your new loan terms, including whether you need to pay PMI.
Increasing Your Chances of a Positive Appraisal
To increase the chances of a favourable appraisal, it's worth investing time and effort into preparing your home. Simple steps like refreshing the paint job, decluttering, and highlighting hidden features can make a difference. Additionally, gathering documents that showcase improvements or legal descriptions of the property can be useful if you need to dispute the appraisal and request a second opinion.
The Impact of Home Value on PMI
The higher your home's appraised value, the more favourable it is for refinancing. If the appraisal shows that your home's value has increased, you may be able to avoid PMI. This is because a higher home value can result in a loan amount that is less than 80% of the home's value, which typically exempts you from PMI requirements. Essentially, a higher appraisal can mean reaching 20% equity in your home, eliminating the need for PMI.
Appraisal Costs and Considerations
It's important to note that appraisals typically cost between $300 and $500 for a single-family home. While this expense is worth it for the potential savings from avoiding PMI, it's a cost to consider when planning your refinance strategy. Additionally, be prepared to provide evidence to support a higher valuation if needed, such as recent comparable sales in your neighbourhood.
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Wait for automatic cancellation when your mortgage balance hits 78%
If you're looking to refinance your mortgage and want to avoid paying private mortgage insurance (PMI), one option is to wait for your lender to automatically cancel it. This will happen when your mortgage balance reaches 78% of the home's purchase price or when the loan term is halfway through, whichever comes first. This is known as the automatic cancellation or final termination of PMI.
Federal law requires mortgage lenders to cancel PMI automatically when the balance of the mortgage drops to 78%. This is based on the original loan amount or the home's purchase price. You can calculate this by multiplying your home's purchase price by 0.78. So, if you bought your home for $200,000, PMI would automatically be cancelled once you've paid off $156,000.
It's important to note that this automatic cancellation only applies to PMI on conventional loans. If you have a loan from the Federal Housing Administration (FHA), you may be paying a mortgage insurance premium (MIP). MIP is often paid for the life of the loan, but there are some exceptions. For example, if you take out an FHA loan now and put down at least 10%, you'll only pay MIP for 11 years. Additionally, if you refinance to a conventional loan, you may be able to eliminate MIP.
While waiting for automatic cancellation can be a hands-off option, it may not be the fastest way to get rid of PMI. You can also request PMI cancellation when your mortgage balance reaches 80% of the home's purchase price, as long as you're current on your payments and have a good payment history. Another option to eliminate PMI sooner is to refinance your mortgage, especially if your home has increased in value or if interest rates have dropped since you took out your original loan.
Remember that PMI is typically required when you buy a home with a down payment of less than 20%. It serves as a safeguard for lenders in case you default on your loan. By waiting for automatic cancellation or requesting cancellation at 80%, you can avoid paying PMI for longer than necessary.
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Pay down your mortgage faster to reach 80% quicker
Paying off your mortgage faster is a surefire way to reach 80% quicker and avoid mortgage insurance on a refinance. Here are some strategies to consider:
Extra Payments and Windfalls
Any extra income or windfalls, such as bonuses, raises, profit sharing, or tax returns, can be directed towards your mortgage. Making an extra mortgage payment each year could significantly reduce your loan term. Budgeting to pay 1/12 extra each month is a cost-effective way to achieve this. Alternatively, rounding up your monthly payments to the nearest $100 can also help.
Prepayment Privileges
Some lenders offer prepayment privileges, allowing you to make a lump-sum payment directly to your outstanding principal. Open mortgages typically have higher interest rates but offer more flexibility, allowing you to prepay in part or in full without a prepayment charge. Closed and convertible mortgages often permit prepayments of 10% to 20%.
Downsizing
Consider downsizing to a smaller, less expensive home. By selling your current home and purchasing a new one, you may be able to pay off a significant portion of your new mortgage with the profits. This reduces your overall debt and lowers your monthly payments, allowing you to focus on paying off the new mortgage quickly.
Refinancing
Refinancing your mortgage can help you take advantage of lower interest rates, reducing the amount you pay towards interest. You can also choose to reduce your loan term, which, combined with lower interest rates, can help you pay off your mortgage faster.
Prioritize Financial Goals
Before accelerating your mortgage payments, ensure you've addressed other financial priorities. These include paying off consumer debt (credit cards, car loans, student loans), building an emergency fund, investing for retirement, and saving for your children's education (if applicable).
By implementing these strategies, you can work towards paying down your mortgage faster, reaching the 80% mark sooner, and avoiding mortgage insurance when refinancing.
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Frequently asked questions
Private Mortgage Insurance (PMI) is a type of insurance that protects your mortgage lender if you default on your loan repayments. It is typically required when you make a down payment of less than 20% on a conventional loan.
You can avoid PMI by choosing a special, no-PMI loan or by getting an 80/10/10 piggyback loan that simulates a 20% down payment. You can also refinance your FHA loan into a conventional loan without PMI if you have sufficient home equity (at least 20%).
You can calculate your LTOV (loan to original value) ratio by dividing your current unpaid principal balance by the purchase price of your home or the appraised value, whichever is less. If your LTOV ratio falls below 80%, you may be eligible for PMI cancellation.
Mortgage Insurance Premium (MIP) is the type of mortgage insurance that's exclusive to FHA loans. It serves the same function as PMI but is charged on FHA loans instead of conventional loans.
Removing MIP from an FHA loan typically involves refinancing into a new type of loan, such as a conventional loan.
