Alyssa Lane
Private mortgage insurance (PMI) is a requirement when the down payment is less than 20% of the purchase price. It allows borrowers to obtain loans with lower down payments, but it's an additional cost that many buyers want to remove. PMI cancellation occurs automatically when the mortgage balance reaches 78-80% of the original home value, but you can request early cancellation by contacting your loan servicer. To do this, you'll need to get an appraisal to determine your home's current value and ensure it meets the lender's requirements. An appraisal usually costs a few hundred dollars, depending on location and property characteristics.
| Characteristics | Values |
|---|---|
| When to remove mortgage insurance | When the mortgage balance reaches 80% of the original home value |
| When the loan term is at its halfway point | |
| When the balance of the mortgage drops to 78% of the home's purchase price | |
| If the home has been owned for at least five years and the loan balance is no more than 80% of the new valuation | |
| If the home has been owned for at least two years and the remaining mortgage balance is no greater than 75% | |
| Cost of appraisal | A few hundred dollars, depending on location and property characteristics |
| On average, $350 to $550 | |
| Other options | Refinancing |
| Getting a reappraisal | |
| Paying down the mortgage faster |
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What You'll Learn
Build 20% equity in your home
Building 20% equity in your home is important for a few reasons. Firstly, it can help you create wealth and maintain your home while living in it. It can also increase your net worth and provide you with cash through a home equity loan or a home equity line of credit (HELOC). Here are some ways to build 20% equity in your home:
Shop around for mortgages with lower interest rates: Studies have shown that borrowers who compare mortgage rates from multiple lenders can save thousands over the life of their loan. A lower interest rate allows more of your monthly payment to go towards your loan balance instead of interest charges. Even a small difference in the interest rate can significantly impact building equity in your home.
Make every mortgage payment and pay more than the minimum: Ensure that you make all your mortgage payments on time and try to pay more than the minimum amount required. This will help you build equity faster by reducing the outstanding principal that you still owe.
Stay in your home to take advantage of any increase in its value: The longer you stay in your home, the more likely you are to see appreciation in its value, which adds to your equity stake.
Make improvements to your home that add value: Research and consider making improvements to your home that can increase its value. However, try to avoid financing these improvements with your home equity, as it may not be worth it if the improvements eat into your cash reserves.
Verify your home's value through an appraisal: Get an appraisal or another official valuation of your home to verify that its value hasn't declined below the original value. This can help you track when it's time to remove Private Mortgage Insurance (PMI).
It's important to note that building home equity takes time and consistent effort. By combining these strategies and staying patient, you'll be well on your way to achieving 20% equity in your home.
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Request a reappraisal
Requesting a reappraisal is a valid way to remove private mortgage insurance (PMI) from your loan. Lenders require PMI when the down payment is less than 20% of the purchase price, allowing borrowers to obtain loans with lower down payments. However, PMI is an additional cost borne by the borrower, and it can increase monthly payments, impacting personal finance goals.
To request a reappraisal, you will need to contact your loan servicer and confirm that you have enough equity in your home to meet the lender's criteria. The lender's criteria for removing PMI typically include having a good payment history and no unpaid contract work on the property. You can calculate your equity by dividing your loan balance by the original purchase price or using an online loan-to-value (LTV) calculator.
The reappraisal process involves hiring an appraiser to determine your home's current value and ensure it meets the lender's requirements under the Homeowners Protection Act. The cost of an appraisal typically ranges from $350 to $550, but it can vary depending on your location and property characteristics. Some lenders may accept a broker price opinion (BPO), which is usually cheaper.
It is important to note that you should check with your mortgage servicer before arranging an appraisal or BPO. They may have specific requirements or forms for you to fill out. Additionally, you should consider the timing of your request. If you are close to hitting the 20% equity benchmark, you may want to wait until you automatically qualify for PMI removal to avoid the extra cost of an appraisal.
By requesting a reappraisal and meeting the lender's criteria, you can successfully remove PMI from your loan, reducing your monthly costs and improving your financial situation.
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Refinance your mortgage
If you have a conventional loan and put down less than 20% when you bought your home, you’re probably paying for private mortgage insurance (PMI). This insurance protects your mortgage lender if you default on your loan repayments, but it also raises your monthly payments.
Fortunately, you don't have to pay PMI forever. One way to remove it is to refinance your mortgage. When you refinance, you take out a new loan to replace your existing mortgage, and you can use the new loan to pay off your current one.
First, check your eligibility. You'll need to have built up at least 20% equity in your home to be eligible to remove PMI. You can calculate your equity by dividing your remaining loan balance by the current value of your home and multiplying by 100. If the result is less than 80%, you may be eligible to remove PMI.
Next, contact your lender to discuss your options. They may require a new appraisal to verify the current value of your home. Depending on the lender, they may also re-evaluate PMI based on the original appraisal.
Then, if you decide to proceed, you'll need to apply for a refinance loan. This process will involve providing financial information and documents, similar to when you applied for your original mortgage.
Finally, if your refinance application is approved, you'll use the new loan to pay off your existing mortgage, and you'll no longer have to pay PMI.
Keep in mind that refinancing can involve closing costs and other fees, so be sure to consider the potential costs as well as the savings you could achieve by removing PMI.
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Make extra payments
Making extra payments is a strategy to eliminate private mortgage insurance (PMI). PMI is often required when the down payment is less than 20% of the purchase price. It is a type of insurance that safeguards lenders against the risk of borrower default. It is typically required for loans with a down payment below 20% of the home's purchase price.
To remove PMI, you can make extra payments toward your principal balance to meet the requirements to remove PMI faster. You can check with your lender to see if this is allowed for your loan. You can prepay your mortgage in several ways, including by making biweekly payments or an additional payment each year, or by paying one lump sum at any time. Check with your lender or servicer to ensure those extra payments go to the loan's principal and not your next payment or interest.
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 cancellation as soon as your balance hits 80% of the home's original value, as long as you're in good standing with your payments.
You can accrue 20% equity in your home sooner than scheduled if you can afford to pay down your mortgage early. You can do this by slowly building your savings and then making one large payment, or by making biweekly mortgage payments, which might align your payments with your paychecks and lead to making two extra payments each year.
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Contact your loan servicer
Contacting your loan servicer is a crucial step in removing private mortgage insurance (PMI). Here are some detailed instructions on how to go about it:
Understanding the Basics
Before reaching out, it's important to understand the role of your loan servicer in the PMI cancellation process. They are the ones who will process your request, provide you with specific forms, and guide you through the requirements set by your lender.
Timing Your Request
Making the Request
The law requires that your request to cancel PMI be made in writing. This can be in the form of a letter or a specific form provided by your servicer. Make sure to include all the necessary details, such as your name, property address, and loan number.
Providing Documentation
When making your request, you'll need to provide supporting documentation. This includes proof of your good payment history, confirmation that there are no other liens on the property, and a professional estimate of your home's current value. This could be in the form of a recent appraisal or a broker price opinion (BPO), depending on your state's requirements.
Following Up
After submitting your request, stay in communication with your loan servicer to ensure that your PMI cancellation is on track. They may require additional information or have specific milestones to share with you. Keep an eye on your mortgage statements to verify that the PMI has been removed once all requirements are met.
Remember, the specific requirements and processes may vary depending on your loan type, lender, and state regulations. Always refer to the information provided by your loan servicer and seek clarification from them if needed.
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Frequently asked questions
Private Mortgage Insurance (PMI) is a type of insurance that homeowners are required to buy if they put down less than 20% on a conventional loan. It protects lenders in case of borrower default on mortgage payments.
There are several ways to remove PMI:
- Wait for it to be cancelled automatically when your mortgage balance reaches 78-80% of the original home value.
- Request early cancellation by contacting your loan servicer if you have enough equity in your home.
- Get a reappraisal to prove that the loan-to-value ratio has decreased due to an increase in your home's value.
- Refinance your mortgage.
An appraisal typically costs between $350 to $550, depending on location and the characteristics of your property.
An appraisal determines the current value of your home to prove that it meets the lender's requirements.
It's important to check with your lender or servicer about the specifics of cancelling PMI for your loan type. You can also make extra payments toward your principal balance to meet the requirements for removing PMI faster.
