Lift House Loan: Remove Insurance

If you're looking to remove private mortgage insurance (PMI) from your home, there are several options available to you. PMI is a type of insurance that some lenders may require you to pay if your down payment on your house is less than 20%. This insurance protects the lender in case you default on your loan. While it enables you to make a smaller down payment, it can add hundreds of dollars to your monthly payments. Here's an overview of how to remove PMI from your loan:

- Automatic Cancellation: Your PMI will automatically be cancelled when your loan-to-value (LTV) ratio reaches 78% or when you reach the midpoint of your loan's amortization schedule. For example, if you have a 30-year mortgage, the midpoint would be after 15 years.

- Request Early Cancellation: You can request PMI cancellation when your mortgage balance reaches 80% of your home's original value. This can be done by submitting a written request to your lender or servicer.

- Refinance Your Mortgage: If interest rates have dropped, you may consider refinancing your mortgage to get a lower rate and also remove PMI if the new loan balance is less than 80% of your home's value. However, refinancing comes with closing costs and other fees.

- Get a New Appraisal: If your home's value has increased due to rising property values or home improvements, you may be able to request early PMI cancellation. You'll need to order a new appraisal or broker price opinion to prove the increased value.

Wait for automatic termination

If you're looking to remove private mortgage insurance (PMI) from your loan, one option is to wait until you qualify for automatic or final termination of PMI. This is often the easiest option as it requires no proactive measures on your part.

The "PMI Cancellation Act", formally named the Homeowners Protection Act of 1998, assists homeowners in getting rid of their PMI. The act dictates that your mortgage lender or servicer must automatically terminate PMI when your loan-to-value (LTV) ratio reaches a certain threshold. Specifically, your PMI will be terminated when your LTV ratio drops to 78%, meaning your mortgage balance is 78% of your house's purchase price. This is known as final termination.

Alternatively, the servicer must cancel the PMI at the halfway point of your loan's amortization schedule. For example, if you have a 30-year mortgage, the midpoint would be after 15 years. If you have a 15-year loan, the halfway point is 7.5 years. The PMI payments must stop even if your mortgage balance hasn't yet reached 78% of the home's original value.

To qualify for automatic termination of PMI, you must be current on your monthly payments and have no delinquent, skipped, or insufficient payments. Additionally, your loan must be for a single-family principal residence.

Request cancellation

If you want to request the cancellation of your private mortgage insurance (PMI), there are a few things you need to do. Firstly, check that you have built up at least 20% equity in your home. You can calculate this by multiplying your original home purchase price by 0.8.

Once you have reached this threshold, you can make a request to your lender to remove your PMI. This request must be made in writing, and you must be current on your mortgage payments with a good payment history. Your lender may also require you to meet other conditions, such as having no other liens on the home, such as a second mortgage.

In some cases, your lender may require a home appraisal to confirm that the value of your home has not declined. If your home's value has decreased, you may not be able to cancel your PMI, even if you have reached the required equity threshold.

It's important to note that PMI rules differ for government-backed loans, such as FHA, VA, and USDA loans. For example, FHA loans typically require an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP) that cannot be canceled unless you put down at least 10% at closing. On the other hand, VA loans require an upfront funding fee instead of ongoing mortgage insurance, and USDA loans have their own specific requirements.

Refinance

If you have a lender-paid mortgage insurance (LPMI) loan, the only way to cancel your loan-to-value (LTV) insurance is to refinance your mortgage. LPMI is a type of insurance that you must pay for the duration of your loan. It allows you to avoid adding a fee to your monthly payment, but you pay a slightly higher interest rate.

• Reach 20% Home Equity: You must reach 20% equity in your home before you are allowed to refinance. If you refinance with less than 20% equity, you will need to pay for LTV insurance again.
• Compare Lenders: You don't have to refinance with your current lender. Compare lenders in your area and choose one that suits your needs. Check their refinancing standards to ensure that you qualify before applying.
• Apply for Refinancing: Fill out an application and submit your financial documentation. Remember to specify that you want to refinance to a conventional loan.
• Wait for Underwriting and Appraisals: Once you apply, your lender will begin the underwriting process, where a financial expert will review your documents to ensure you qualify for refinancing. They will also help you schedule a home appraisal.
• Acknowledge Your Closing Disclosure: After underwriting and the appraisal, your lender will send you a closing disclosure document outlining your new loan terms and closing costs. Acknowledge this as soon as you receive it.
• Attend Closing: At the closing, you will pay your closing costs and sign the new loan agreement. From there, you will make payments to your new lender.

It is important to note that refinancing comes with closing costs and a potentially higher interest rate, so be sure to weigh these against your potential savings from the new loan terms.

Get a new appraisal

If you want to remove private mortgage insurance (PMI) from your loan, you can request a new appraisal of your home. This is because, in a hot real estate market, your home equity could reach 20% ahead of the loan payment schedule due to price appreciation. In this case, it might be worth paying for a new appraisal.

If you've owned your home for at least five years, and your loan balance is no more than 80% of the new valuation, you can ask for PMI cancellation. If you've owned the home for at least two years, your remaining mortgage balance must be no greater than 75%.

Appraisals for a single-family home have risen in recent years. The average cost is between $300 and $800 (or more), depending on your area, according to the National Association of Realtors. Some lenders might be willing to accept a broker price opinion instead, which can be a cheaper option than a professional appraisal. On the other hand, professional appraisals are highly regulated and provide an unbiased assessment. Either way, paying a few hundred dollars now can save you multiples of that over the course of expected PMI payments.

Keep in mind that you'll likely need to pay for a home appraisal to verify the new market value. However, this cost can be worth it to avoid more PMI payments.

Pay down your mortgage earlier

Paying down your mortgage early can help you save thousands of dollars in interest. Here are some strategies to help you pay down your mortgage earlier:

Switch to a Biweekly Payment Schedule

Paying your loan on a biweekly basis instead of monthly can help you pay off your mortgage sooner. For example, if your monthly mortgage payment is $1,000, you can pay $500 every 2 weeks instead of $1,000 at the end of the month. This will allow you to make 13 payments on your loan instead of the standard 12, reducing your debt faster without putting a strain on your cash flow.

Commit to Making One Extra Payment a Year

If you are financially able to, consider making an extra mortgage payment each year. This could be done using your tax refund. This strategy could potentially enable you to pay off your mortgage several years earlier than your original payoff date, saving you a lot of money in interest.

Make Extra Payments Towards Your Principal

Making extra payments specifically towards your loan's principal is optimal. You can prepay the principal on your loan, reducing the amount of money you'll pay interest on before it can accrue. Even $50 a month can mean a dramatic drop in your loan balance and total interest paid over the loan's term. However, be sure to inform your lender that you want these extra payments to go towards your principal balance and not your next payment.

Refinance to a Shorter Loan

If you have built up a significant amount of equity in your home, you may want to consider refinancing to a shorter term. This will allow you to save money on interest without worrying about penalties or scheduling extra payments. Keep in mind that refinancing your mortgage to a shorter term will increase your monthly payments, so be sure to do the math and ensure you can cover the extra financial burden.

Make One Extra Mortgage Payment Each Year

Making an extra mortgage payment each year could significantly reduce the term of your loan. A budget-friendly way to do this is to pay 1/12 extra each month. For example, by paying $975 each month on a $900 mortgage payment, you'll have paid the equivalent of an extra payment by the end of the year.

Round Up Your Mortgage Payments

When budgeting for your mortgage payment, round up to the next highest $100 amount. For example, pay $800 instead of $743, or $900 instead of $860. This can help reduce the term of your mortgage significantly.

Try the Dollar-a-Month Plan

With the dollar-a-month strategy, you increase your payment by $1 each month. For example, pay $900 the first month, $901 the second month, and so on. For a 30-year, $900-per-month mortgage with a 6% fixed interest rate on a loan of $150,000, you could reduce the term of your mortgage by eight years.

Use Unexpected Income

Send any unexpected windfalls, such as holiday bonuses, tax returns, or credit card rewards, straight to your mortgage company. Using this money won't cut into your regular monthly budget.

Weigh the Benefits and Risks

Before committing to paying off your mortgage early, it's important to consider the benefits and risks. Paying down your mortgage early reduces the amount you'll pay over time. However, many finance experts suggest that it may be more beneficial to invest that money instead, such as by putting it into a retirement account or an investment fund. Additionally, if you have other sources of debt, such as credit card debt or student loans, it may be more advantageous to focus on paying those off first, as they often have higher interest rates than most mortgages.

Be Mindful of Prepayment Penalties

Some loans carry prepayment penalties, which are fees charged by the lender if you pay off your mortgage prematurely. Prepayment penalties are usually equal to a certain percentage of the interest you would have paid. Consult your mortgage lender and ask about any prepayment penalties on your loan before making a large extra payment.

Ensure You Have an Emergency Fund

Before putting extra money towards your mortgage loan, ensure you have enough money set aside for emergencies. It's much more difficult to take money out of your home than it is to withdraw money from a savings account. A good rule of thumb is to have 3-6 months' worth of household expenses in liquid cash before focusing on paying off your mortgage early.

Consult a Financial Planner

Paying off your mortgage early is a significant financial decision, and it's recommended to consult a financial planner before making any big decisions. They can help you understand your options and determine the best course of action for your specific circumstances.

Frequently asked questions