Are you paying PMI, or Private Mortgage Insurance, to your mortgage lender? The purpose of PMI is to protect lenders from borrowers who stop paying their mortgage and end up in default, but it’s generally required only if you are borrowing more than 80% of your home’s value, i.e. if you have less than 20% equity. PMI can add hundreds of dollars to your monthly mortgage payment, but even if the monthly cost is not that high, the amounts add up over the course of the years that you are paying down your mortgage.
Here’s the good news: There are several ways to get rid of PMI.
The first way to eliminate PMI is to do nothing. Most mortgages have a provision that automatically terminates PMI when the balance on the loan reaches 78% of the original value of the property (i.e., you have 22% equity) according to the original amortization schedule. As long as you make timely monthly payments, your lender will eventually notify you that PMI has terminated – and your monthly payment should go down. If you choose this option, be sure to note the scheduled termination date in case your lender is slow to cancel PMI. The PMI termination date is required to be disclosed at closing and therefore can be found in your escrow documents.
But automatic termination of PMI only proceeds according to the original amortization schedule. So what happens if the value of your property increases before the contractual PMI termination date? This can happen if you make extra payments toward the loan’s principal, property values in the area go up, or a remodel increases the value of your home. If you believe you have 20% or more equity prior to the original PMI termination date, you have a couple of options.
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Perhaps the easiest option is to submit a written request to your lender to terminate PMI early. For your request to be considered, you will need to have made timely payments and be current on the loan. Additionally, if the increase in equity is due to an increase in property value rather than extra principal payments, you will likely need to provide evidence supporting the increased property value, such as a new appraisal (which will cost several hundred dollars). Your lender may insist that you reach 22% equity before agreeing to cancel PMI early.
Another option is to refinance your mortgage. If you now have 20% or more in equity, the new mortgage will not require PMI. However, note that there is often a “seasoning” requirement that you wait a minimum of two years before you can refinance to eliminate PMI. Therefore, if your equity has increased to over 20% within the first two years of your mortgage, you may not qualify for a refinanced mortgage.