Private Mortgage Insurance (PMI) adds bulk to your loan since you have to pay for the premiums every month together with your loan repayment. Therefore, it would be wise to find ways to get rid of PMI from the beginning, but if you are already tied to it, there are also ways to salvage yourself once you meet some conditions that are required by the lender and by law.
To get rid of PMI, you can refinance your loan, request for cancellation once you hit 80 percent of the loan-to-value ratio, get a new appraisal if your home has appreciated in value, or wait for automatic cancellation.
Another way to avoid PMI is to have at least 20 percent equity, which means paying more than a 20 percent down payment of the original purchase price.
When we talk of PMI, there are several things that you need to understand. First, you need to understand what PMI means, what it covers, how it works, and how to cancel or get rid of it, among other things you need to know. Therefore, in this article, I will discuss everything you should know about Private Mortgage Insurance (PMI).
What Is PMI, Or Private Mortgage Insurance?
Private Mortgage Insurance (PMI) is insurance coverage against unconventional loans that thhttps://youtu.be/GmCMwGQNUbUe lender may require you to take. Especially when you make a down payment that is less than 20% of the total value of the home you want to buy, you’ll most likely face the added cost of mortgage insurance.
The purpose of the PMI is to insure the lender against loss in the event that you stop your monthly payments towards the mortgage loan. Of course, PMI has an impact on the total cost of your loan since the monthly mortgage insurance premiums are added to the closing costs and your monthly repayment of the loan term hence increasing the total loan cost.
Of course, there are so many factors that lenders would consider when issuing mortgage loans to their customers, including the buyers’ credit worthiness. If the buyer has some credit irregularities record, they are then required to have insurance for their mortgage, which is where PMI comes in handy.
Conventional loan lenders who may not require you to pay PMI typically charge a higher mortgage interest rate on their loans so that they can protect themselves, and the repayment costs are almost equal to that of taking a PMI with a conventional mortgage.
How Private Mortgage Insurance Works
It is important to understand that PMI or Private Mortgage Insurance only works for the benefit of the lender. It works to protect the lender against losses due to high-risk loans to buyers who make less than 20% down payment for the homes they intend to buy.
Therefore, if you want to buy a home, you ought to pay over 20 percent down payment, then the lender may not require you to insure your loan, and this also depends on your credit score and payment history. If you have a good credit score, you will likely attract low-interest rates, and the lender may not require you to pay for the Private Mortgage Insurance on high-ratio mortgage loans.
It is also important to understand that PMI may only be required on unconventional loans or loans that are not guaranteed or insured by the government. For example, loans that the government insures, such as the Fair Housing Administration (FHA), do not require private mortgage insurance.
Therefore, PMI only works to cover and protect the mortgage lender but does not protect the buyer. In the event you are unable to clear your loan balance, the lender will be covered by the insurance that you took against that loan, but you are likely to lose your home due to foreclosure.
How Much Does PMI Cost?
There is no fixed cost of PMI since it varies depending on many factors that the lender considers. However, the PMI usually costs between 0.3% – 1.2% of the total amount of the loan borrowed. That translates to about $30 – $70 per month for a loan of $100,000.
To calculate PMI cost, you will need to multiply the rate by the total mortgage amount, giving you the total PMI. With the total PMI, you will then divide it by the number of months that you have to pay. For instance, if you took a 30-year mortgage, you will divide the total PMI that you get by 360 months. That is:
PMI Rate x Mortgage = PMI Total/Mortgage Term(Months)
It is important to note that the PMI rate depends on many factors, as already mentioned. Such factors include the following:
- Down payment – when you make a deposit that is less than 20 percent of the home’s total cost, the lender would require that you take private insurance policy to protect themselves from the default risks of the buyers.
- Credit score – if you don’t have a good and solid credit score, you will definitely be obliged to pay for premium mortgage insurance. Of course, the lender analyzes the customer’s credit ratings and score, and if you have been a regular customer and have always paid your debts on time, you are likely to avoid paying PMI against your loan.
Another advantage of having a good credit history is that you will likely attract low interest on your loan. In addition, if you have 760 and above in your credit score, your PMI rates will be very low if you have to pay for it.
- Mortgage loan amount – the PMI rate when applied to a small loan amount means you will pay less than when applied to a considerable amount. Therefore, the higher the amount you borrow, the higher the PMI you ought to pay, and vice versa.
- Type of mortgage – when it comes to the type of loan, there is fixed-rate mortgage and adjustable rate mortgage. For adjustable-rate mortgages, the rates go up, making them costlier than the fixed-rate mortgage. That means the PMI for a fixed-rate mortgage is lower compared to that of an adjustable-rate mortgage.
What Does PMI Cover?
When you default on repaying your loan, your home is sold through a foreclosure sale, and in some instances where the foreclosure sale is not enough to repay your debt in full, PMI comes handy to reimburse the mortgage lender. However, lender-paid Private Mortgage Insurance does not cover or pay for your mortgage when you default. It is only there to cover and protect the lender.
That is why PMI is needed when you pay a down payment of less than 20 percent of the home purchase price so that the lender does not incur a loss if you default on repaying your loan.
Another concern that most people have is whether PMI can pay for your house in the event of death. In this case, it is important to note that the protection is entirely for the lender and not the borrower. That means if you want protection against your mortgage in the event of death, you should get mortgage protection insurance.
How To Get Rid Of PMI (7 Easy Options)
There are so many ways to get rid of PMI. But, of course, if you want to avoid PMI, you must make a down payment of more than 20 percent of the original home purchase price. When you do that, your lender may not need you to pay for PMI, especially if you have a good credit report.
If you already have a PMI attached to your mortgage, there are various ways to get rid of it, and some of the methods include the following:
1. Refinance To Get Rid Of PMI
If your original mortgage comes with a high-interest rate, you can refinance it to reduce the costs of interest that you should have paid. Refinancing your loan means you take a loan with a lower interest rate to pay for the mortgage with high interest.
Of course, if refinancing your mortgage can save you a good amount of money, then it is a good idea to do so. However, you need to make some good calculations to ensure you are not running a costlier process. You may need a mortgage refinance calculator taking in current interest rates to help you understand the numbers before refinancing your mortgage.
2. Request PMI Cancellation When Mortgage Balance Reaches 80 Percent
When your mortgage balance reaches 80 percent, you can write to request the current lender to remove PMI from your loan. This percentage is referred to as the loan-to-value ratio. You, therefore, need to calculate your loan-to-value ratio by dividing the mortgage balance by the original home appraisal value of your home. That is:
Mortgage balance ÷ Original Appraised Value = Loan-To-Value Ratio.
Once you get the value, you can convert it to a percentage, and if your LTV has reached 80 percent, you can request your lender to cancel the PMI.
3. Get A New Appraisal
Getting a new appraisal means that your home has appreciated in value. If you find that your home has gained more value compared to that in your neighborhood, you can request a new appraisal.
Sometimes it comes with a cost since you are responsible for paying for the new appraisal, and the costs of the appraisal can vary between $313 and $421 depending on the type of home and the time of the year.
It is important to note that when the value of your home appreciates, it shortens the time you will need to cancel the PMI than if it depreciates. Therefore, you can write to your lender to request cancellation if you have met the conditions.
4. Wait For Automatic Cancellation
When your loan-to-value ratio hits 78%, the lenders are required by the law to cancel the PMI automatically. However, you need to update your monthly mortgage payments before the lender can cancel your PMI. Late payments in the month that your PMI should be canceled, your lender may only cancel it when you make payments on time.
Another unique thing about automatic cancellation is when the borrower has reached the midpoint on the repayment schedule. The law, therefore, requires the lender to cancel the PMI automatically regardless of whether the borrower has reached 78 percent LTV.
How To Speed Up The Process
If you want to speed up the process of canceling your PMI, you need to implement strategies to help you achieve an 80 percent loan-to-value ratio. Some of the ways to accomplish this faster include the following:
5. Make Lump Sum Payments
If your current principal balance has yet to reach 80 percent of the total loan that you borrowed, or you are still some amount to getting there, you can make a lump sum payment to achieve that if you can. That will make it easy for you to request the cancellation of PMI ahead of time.
6. Payments Ahead Of Schedule
Instead of waiting to pay every month, you can pay more ahead of your schedule to achieve 80 percent LTV earlier. But, of course, the lenders would allow you to make extra mortgage payments ahead of schedule, and you can do that to finish paying off your mortgage principal earlier and avoid costly PMI premiums.
7. Request For Appraisal
You can upgrade your home to give it more value and request a new professional appraisal. If your home value increases faster, you will likely get rid of PMI faster. To do this, you can repaint, declutter, repair the doors and windows, and give your kitchen, garden, and exterior of your house a new look.
Government Loans And Mortgage Insurance
Government loans are those that are insured by the state, such as the Federal Housing Administration (FHA), the US Department of Agriculture (USDA), and the Department of Veterans Affairs (VA). These types of loans do not need to have a PMI since the government already backs them, and in case of default, the government reimburses the lender.
On the other hand, mortgage insurance is the additional payments you pay every month on top of your monthly loan payment. This money insures the lender against default but does not pay for the borrower in case they cannot continue paying the loan.
Therefore, this type of mortgage insurance is usually a private insurance cover that a lender requires the mortgage servicer to take against the mortgage amount. If the borrower defaults, the lender is reimbursed to avoid the losses that may come after foreclosure.
Do USDA Loans Have PMI?
As I noted earlier, PMI is only required for non-government-backed or conventional mortgage loans. Government-backed loans are insured by the government agency and hence do not require PMI. Therefore, USDA loans, one of the government-backed mortgage types, do not need private mortgage insurance (PMI).
It is important to know that USDA loans only serve people in areas deemed to be rural and lower-income home buyers. Therefore, not everyone is eligible for this. You can check the eligibility map to determine whether you qualify for USDA mortgage loans.
DO VA Loans Have PMI?
VA is also a government-backed loan; hence, you don’t need to pay private mortgage insurance against this loan. In addition, VA loans are guaranteed by the United States Department of Veteran Affairs.
With this loan, you don’t need a down payment to qualify for it. Of course, it does not seriously look into your credit history since their credit standards are a bit loose compared to other loans. However, you must meet some requirements or conditions to qualify, and this loan is more affordable than conventional loans.
Therefore, as mentioned, PMI is not necessary for you to get VA loans since the government backs it, but at the end of the loan period, you are required to pay a VA funding fee – a percentage of the total loan value. The funding fee is only meant to keep the program running so that future borrowers can also benefit from it.
Do FHA Loans Have PMI?
FHA loans also don’t require PMI. However, these loans require one to pay an upfront mortgage insurance premium. Usually, the premium rate is 1.75 percent of the total loan amount, and with this, you have to pay upfront. Apart from the upfront payments, you are also required to pay an annual MIP that varies depending on the size of your loan. Of course, the purpose of MIP, just like that of private mortgage insurance, is to protect the lender in case you default on your payments.
Conclusion
Getting rid of PMI comes with conditions you should meet if you already have it attached to your loan. But of course, you can avoid it by making a down payment of more than 20 percent of the home purchase price. Therefore, whether it’s a 30-year loan or a no-PMI loan, you must consider all the costs you will pay for any loan type
Another thing you should have learned is that you need to hit 80 percent of the total mortgage if you request cancellation. Therefore, this article has been helpful in understanding everything about PMI and how to get rid of it for the entire loan term.
Frequently Asked Questions:
Can I Cancel PMI If My Home Value Increases?
You need at least 20 percent equity in your home, and you can request to cancel PMI. Remember, with a down payment of more than 20 percent of the home purchase price, your lender may not require you to pay a PMI. That also is possible when you reach an equity stake of at least 20 percent.
With the value of your home increasing, your equity stake in that home also increases. However, this is also true when your house loses value or depreciates. With the latter, your equity decreases, and it will take a long for you to cancel the PMI if the depreciation continues. Therefore, if your home value has increased, you can request a new appraisal, and if the equity has hit 20 percent, you can then ask for a cancellation of PMI.
Can I Get Rid Of PMI With An Appraisal?
Yes, you can request a new appraisal of your home if the value has increased since you took a mortgage loan. The mortgage company will then initiate the appraisal process but at your cost to determine your home’s new value. Of course, with appreciation, you are likely to hit 20 percent equity faster, where you can request for PMI to be removed.
Can A Bank Refuse To Remove PMI?
Yes, if you have not met the conditions for PMI removal, the bank will decline your request. For you to request removal, apart from the automatic cancellations when you hit 78 percent of the loan-to-value ratio, you need to have reached 80 percent LTV to request, be current on your mortgage payments, and meet other requirements by the lender.
Therefore, your bank will not grant your cancellation request if you have not met the conditions. On the other hand, if you have met the requirements as stipulated by your lender or bank, you will definitely have your PMI canceled.
Do You Have To Wait 2 Years To Remove PMI?
Some loans have a seasoning requirement that requires the mortgage loan borrowers to wait for at least two years before you can refinance your loan. That means you cannot refinance your loan before the seasoning requirement ends, then you can request for the cancellation of PMI.
Is PMI Based On Value Or Purchase Price?
PMI can be calculated based on either the purchase price or the appraised value. When the two are the factors, the value that is less is used. That means the PMI rate is calculated using the lower purchase price.
