Many homeowners have PMI or private mortgage insurance. While this type of insurance is very common and forms a standard part of many mortgage payments, it also increases how much you have to pay each month for your home in addition to your base mortgage balance.
Since getting lower mortgage payments is always advantageous in the real estate world, it helps to know how to remove PMI whether you’re a new homeowner or looking to make extra payments or other changes to accelerate paying off your mortgage for a home you’ve owned for several years. Let’s break down how to remove PMI in detail.
What Is PMI?
Private mortgage insurance is a very common, frequently required insurance type used for conventional mortgage loans.
When you make a home purchase and make a down payment of less than 20% of its sales price, you may be required to pay PMI. Private mortgage insurance protects mortgage lenders or servicers if homeowners stop making payments on mortgage loans, if they try to go through refinancing or cancellation, etc.
Say that you purchase a single-family home for $300,000. If you want to avoid paying PMI, you’ll need to make a down payment of at least $60,000 upfront or 20% of the listing price. PMI is, in many ways, a hedge against homeowners who default on their loans, which would leave mortgage lenders in shaky financial situations. But it means you take longer to pay down your loan balance.
While there are many types of private mortgage insurance, two are more common than others.
LPMI, or lender-paid mortgage insurance, is exactly what it sounds like: your mortgage lender pays for the mortgage insurance premium. However, this is only true on paper; you, the homeowner, pay for the LPMI over the lifespan of your loan due to a higher interest rate on whatever type of mortgage you choose.
Unlike BPMI (see more below), you cannot cancel your LPMI if your equity reaches a certain amount. That’s because lender-paid mortgage insurance is baked into the loan’s terms and conditions through the interest rate. So why take this type of loan?
LPMI could allow your monthly mortgage payment to be lower than it would be with PMI payments, even with a slightly higher interest rate. But this is, of course, contingent on market conditions and the overall interest rate affecting home prices around the country.
Then there’s BPMI or borrower-paid mortgage insurance. This is the most common type of PMI overall. With BPMI, you have an extra monthly fee added to your mortgage payment every month. As soon as your loan closes (and you purchase your house), you pay the BPMI fee every month until you reach a total of 22% equity in your home. The equity is based on the house’s original purchase price or the initial value of your home based on the home appraisal and determined property value.
Once you reach the 22% equity market, your mortgage lender is legally required to cancel the BPMI, provided that you are still current on your mortgage payments. Reaching this mark usually takes about 15 years.
However, you can ask your lender to cancel your BPMI if you have 20% equity in your home. Your mortgage payments have to be current, and you have to not have any extra liens on your property. But if you have a good relationship with your lender, they may allow you to do this and save money on your monthly mortgage payments.
How Do You Remove PMI? FAQs Answered
As touched on above, you can remove borrower-paid mortgage insurance once you build 20% to 22% equity in your home. Once you do this, your lender will cancel your private mortgage insurance, and you won't have to cover that extra fee with your monthly mortgage payments.
If your property has increased in value since closing, you may be able to get your PMI removed early. Your lender may require you own the home for a certain amount of time before you can request for an early PMI removal. The lender will also need to order an appraisal and they may ask you to provide proof of any recent home improvements done that contribute to your property’s increase in value.
Once you have your PMI removed, you should look at your mortgage bill and make sure the PMI is actually gone after notifying your mortgage lender. Paperwork mix-ups can and do happen, and it’s your responsibility to make sure your PMI is gone if you have reached the above qualifications. Request PMI cancellation quickly so your new loan amount decreases as fast as possible — and so you can accelerate paying down the principal balance.
If you have lender-paid mortgage insurance, your only option is to refinance your loan entirely. You should still reach 20% or 22% home equity so you can avoid having to pay borrower-paid mortgage insurance, of course.
If you choose to refinance your loan or take out a second mortgage, investigate potential lenders carefully to avoid unnecessary fees and make sure they know that you won’t be paying private mortgage insurance. Knowledgeable loan officers, like the kind we employ at Vaster, can help you find the right financing solution for your needs.
With a conventional loan refinance, you could see a lower monthly payment. However, this will require a new appraisal (to determine the up-to-date appraised value), an assessment of the loan-to-value ratio, new closing costs, and new mortgage rates.
What Factors Affect PMI Cost?
Many different factors can affect the cost of private mortgage insurance. Focusing on these factors can minimize how much you have to pay at the end of each month on top of your regular mortgage fee.
Your Down Payment
Firstly, the greater the down payment you make, the less risk a mortgage investor has to take on in order to underwrite your loan. Therefore, even if you can't make a 20% to 22% down payment, consider putting up your down payment about as much as possible. A down payment of 19% may result in a very small PMI fee that is practically negligible.
Your Credit Score
Of course, your credit score will also affect PMI cost in most cases. Your credit score serves as a stand-in metric for your creditworthiness. The higher your credit score, the more trustworthy you are for loans of all types. Getting your credit score higher before applying for a loan may result in a lower PMI payment each month.
If you have a good relationship with your lender, that will necessarily also result in lower PMI payments across the board. Good relationships with lenders mean you have greater institutional trust, so your lender may not feel it is necessary to levy a high private mortgage insurance fee against your loan.
Your Loan Type
Your loan type may further impact the PMI cost for your mortgage. For instance, if you have a leasehold mortgage, you may not have to pay as much private mortgage insurance as you would with an FHA loan from the Federal Housing Administration since leasehold mortgages are a little less risky for lenders in general. With a leasehold mortgage, you don't own the property outright, nor do you own the land it sits on. On the other hand, if you have a standard 30-year loan and no mortgage refinance, your PMI cost may be higher.
However, there are some exceptions to this rule. For example, VA loans from the U.S. Department of Veterans Affairs and USDA loans from the U.S. Department of Agriculture have different PMI rules.
Your Debt-to-Income Ratio
Lastly, your debt-to-income ratio or DTI can impact the PMI cost for your mortgage. Your debt-to-income ratio measures how much debt you have relative to your monthly income. The lower your debt-to-income ratio is — that is, the less that you have relative to your income — the less likely it is you'll have to pay a high PMI fee since the odds of you defaulting on your loan will also be lower.
What Does PMI Cover?
Private mortgage insurance is meant to cover a variety of risks for loan underwriters. Because it’s intended to cover risk, it’s not necessary if you are able to provide a down payment of 20% or more when applying for a mortgage.
The Lender’s Financial Loss
Primarily, private mortgage insurance covers a lender’s potential financial loss if you default on your loan. By taking some extra money from you in the form of PMI, your lender hedges their bet and ensures that they will make some amount of profit even if you default on your loan and are unable to pay down any of your debts.
This does not completely cover a lender’s financial losses, of course. But it does help to soften the blow and, in turn, makes lenders more likely to offer mortgages to people who may otherwise seem too risky to award mortgages to.
When Does BPMI Go Away?
As noted earlier, BPMI goes away when you attain 22% equity in your purchased property. This effectively places you in the same financial state as if you were able to make an initial 20% or more down payment for your property originally.
Once you have 22% equity in your home, you should find that your private mortgage insurance goes away automatically. However, you may need to speak to your lender to make sure that this happens and that you don't continue to pay PMI past this point.
When Does LPMI Go Away?
LPMI never goes away, unfortunately, and it’s always based on your home’s original value, not its current value. Because your private mortgage insurance policy cost is baked into your loan's interest rate, it never goes away by itself, no matter how much equity you build in your property.
The only way to get rid of LPMI is to refinance your loan without private mortgage insurance included in the interest rate payments.
A Final Word
As you can see, private mortgage insurance is something that’s tough to avoid, especially if you are a first-time homebuyer and don’t have enough cash saved up to make a large down payment. But later down the road, you can get rid of PMI and cut down on your monthly mortgage payments for massive savings across the board.
The best starting point in navigating your PMI removal options is to have a conversation with your lender, especially if you think your home has increased in value since closing.
If you are thinking about taking the refinance route, consider speaking with a loan specialist at Vaster that can help you explore all of your options and provide a breakdown of costs associated with refinancing. Contact us today to learn more.
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