Homebuyers with a down payment of less than 20 percent generally must obtain private mortgage insurance or PMI. This is an additional annual cost: about .03 to 1.5 percent of your mortgage.
The amount you pay in PMI depends on your credit score and the amount of your down payment. PMI can add hundreds of dollars to your monthly housing bill. The positive side is that there are ways to get rid of it.
"Private mortgage insurance protects the lender from the high risk presented by a borrower who made a small down payment," says Greg McBride, CFA, chief financial analyst at Bankrate. "Once the borrower has a sufficient capital cushion, the PMI will be eliminated."
How to get rid of PMI
There are options for homeowners eager to save money each month by losing those expensive PMI payments, or even avoiding them altogether (even without making a down payment of 20 percent). Here are some of them.
Pay the balance of your mortgage
For people with PMI, you must have at least 20 percent of capital in the home to eliminate it. You can ask the lender to cancel the PMI when you have paid the mortgage balance at 80 percent of the original appraised value of the home. When the balance falls to 78 percent, the mortgage manager must lower the PMI.
Calculating how much you need to pay is simple. Simply multiply the purchase price of your home by 80 percent. For example, if the purchase price were $ 300,000, then it would multiply .80 by 300,000. The result is $ 240,000, which is the minimum that your loan balance must have before you can get rid of the PMI.
You can prepay the principal of your loan, reducing the balance, which helps you generate capital faster and save on interest payments. Even $ 50 per month can mean a dramatic drop in your loan balance over time.
Some people choose to apply a lump sum to their capital or even make an additional mortgage payment per year. That will take you to the equity level of 20 percent faster.
Refinance your mortgage to exit PMI
When mortgage rates are low, as they are now, refinancing can help you not only get rid of PMI, but also reduce your monthly interest payments. It is a double dose of savings.
The refinancing tactic works if your home has gained substantial value since the last time you obtained a mortgage. For example, if you bought your house four years ago with a down payment of 10 percent and the value of the house has increased 15 percent since then, you now owe less than 80 percent of what the house is worth. In these circumstances, you can refinance a new loan without paying for PMI.
Many loans have a "condiment requirement" that requires you to wait at least two years before you can refinance to get rid of PMI. Therefore, if your loan is less than two years old, you can request a PMI cancellation refi, but it is not guaranteed that you will get approval.
Remodeling or renovating your home to increase the value
If you plan to add amenities or renovate your home, it could increase the value, which could mean more equity. If you cross the finish line of 20 percent capital in the process, then you can throw PMI on the sidewalk.
Whether it's an additional room or a pool, common updates like these can increase the market value of your home. Ask the lender to recalculate your loan-to-value ratio using the new value figure.
Although you can cancel private mortgage insurance, you cannot cancel the Federal Housing Administration insurance. The only way to get rid of FHA insurance is to refinance a loan not insured by the FHA.
Even without a down payment of 20 percent, there are mortgages that do not require PMI
Not all mortgage loans with down payments of less than 20 percent require PMI. This is a good reason why it is worthwhile to shop around for a mortgage.
The Bank of America, for example, has a loan called an Affordable Housing Solution Mortgage that allows down payments as low as 3 percent and there is no PMI requirement.
Flagstar offers the professional loan, which is an adjustable rate mortgage designed for people with high income potential. Borrowers may have low down payments and are not required to obtain mortgage insurance.
Do not use up your bank accounts to escape PMI
While paying PMI every month, or as a lump sum each year, is not a financial trip, homeowners should be careful not to make their finances worse when trying to get rid of PMI.
Most financial experts agree that having some liquidity, in case of emergencies, is an intelligent financial movement. So, before taking advantage of your savings or retirement funds to reach that 20 percent equity mark, be sure to speak with a financial advisor to make sure you're on the right track.
"There seems to be a philosophical aversion to PMI by many buyers that is out of place," says McBride. "While you are not taking an FHA loan, you are not married to the PMI. You can release it once you get a 20 percent capital cushion, which can take only a few years, depending on the appreciation of the price of the home. But don't feel the need to use up to the last penny of cash to make a down payment that avoids the PMI, only to then be left with little financial flexibility. ”
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