If you didn’t put down at least 20% on your home mortgage loan then it is a good chance that you may be paying for private mortgage insurance or PMI.
PMI is insurance that every home owner must have if they have not paid at least 20% of their mortgage off as a way of protecting lenders from buyers who may default on their loans.
There are times when you can put little or no money down and not have to pay for PMI such as getting a VA loan.
If you don’t qualify for any kind of breaks that will exclude private mortgage insurance then you could be paying several hundred dollars a month extra on top of your monthly mortgage payments. Over time this can add up to a lot of money wasted. Now the good news is that banks are required to stop charging PMI under certain situations. I recently read an article that list seven such situations where your PMI could be a thing of the past.
First, if you have paid down your mortgage to 80% of the original loan, you can call your lending institution and request that the PMI be canceled.
Second, if you haven’t paid your mortgage down to 80% but have done improvements to your home that increased the value, you can have your home appraised. If the amount remaining on your mortgage x 1.25 is less than the new appraised value of your home, you can request that the PMI be canceled.
For example, say you owe $170,000 on your home and it just appraised for $220,000 due to a home remodel. Take $170,000 x 1.25= $212,500. $212,500 is less than the value of your home ($220,000) so you can request your PMI to be canceled.
Third, if prices have gone up in your area since you purchased your home, you can have your home appraised. If the amount remaining on your mortgage x 1.25 is less than the new appraised value of your home, you can request that the PMI be canceled.
For example, my husband and I bought a fixer-upper home (before and after photos here) for 40k more than the appraisal value (explanation of why here). We began paying PMI on our home loan. Then the market went up quite a bit just as we had completed our renovation. We had the home officially appraised by a certified appraiser and our equity went up 70k. Our loan to new value was such that we were able to get our PMI removed.
Fourth, if you have paid for your loan for half of its time-frame/schedule (15 years on a 30 year loan), you can request that the PMI be canceled.
For example, say you have a balloon interest loan, or a loan which is heavily front weighted in interest, you may have made payments for 15 years on a 30 year loan and not yet reached the 20% equity required to cancel PMI. Despite not owning 20% equity, once you hit the half way mark on the loan you can request PMI cancellation.
Fifth, start paying extra towards the principal and speed up the time frame you have until you own 20% equity in your home. I show in this post 3 secrets to save over $100,000 on your mortgage that banks don’t want you to know about. How quickly gaining equity can happen by upping payments to principal.
Sixth, If you will end up being able to put down 20% on your new loan, you could try refinancing. Refinancing can be a costly decision. Before you refinance read my Pros and Cons of refinancing here.
Seventh, Wait until you have paid off 22% of your loan and your lender will automatically (as is required) terminate the PMI on your loan. Going this route will cost you months of PMI payments when you could technically request a cancellation once you have paid off 20% of your loan instead of 22%. So I really don’t recommend waiting till your lender automatically cancels.
- You must be current on your payments in order for PMI to cancel.
- Your request to cancel in most cases must be in writing.
- Your lender may request that you provide an appraisal. So contact your lender BEFORE paying for an appraisal and ask them what the process is to get an appraisal done that will be qualified to cancel your PMI.
- With FHA loans you may have to have had the loan for at least 5 years and have paid down to 78% before they will remove the PMI. Although we had an FHA loan and it dropped with the appraisal within the first 6 months, rules are constantly changing. If you have an FHA loan ask your lender what the current rules are.
- If you have a first and second mortgage and together your equity does not meet 20%, lenders are not required to drop the PMI.
- The mandate to automatically remove PMI at 78% only affects new mortgages funded after July, 1999. Fannie Mae and Freddie Mac have said they will apply this mandate to the older loans.