My husband and I bought our home in 2016 with a down payment of less than 20%. So, our lender required us to buy Private Mortgage Insurance (PMI). The same goes if you refinance your home with less than 20% equity. Since buying our home, our home’s value has risen, so now we are looking to see if we are able to eliminate that costly PMI to save ourselves some money. But how in the world do you get rid of it?
I know it seems difficult, but I’ve outlined below the simple steps that we took to get rid of our PMI and it’s definitely worth the effort. We ended up saving over $200 a month!
How to get rid of PMI.
To remove PMI or private mortgage insurance, you must have at least 20% equity in your home. You may ask the lender to cancel PMI when you have paid down the mortgage balance to 80% of the home’s original appraised value. When the balance drops to 78%, the mortgage servicer is required to eliminate PMI. Try calling your mortgage lender and see how close you are to that 20% to see if they can just cancel it. This one little phone call could save you money this year! For example, PMI on a $300,000 home is about $3,000 per year.
Other ways to cancel PMI sooner.
Here are steps you can take to cancel mortgage insurance sooner or strengthen your negotiating position:
- Refinance: If your home value has increased enough, the new lender won’t require mortgage insurance. When mortgage rates are low, as they are now, refinancing can help you to not only get rid of PMI, but to reduce your monthly interest payments. It’s a double dose of savings.
- Get a new appraisal: Some lenders will consider a new appraisal instead of the original sales price or appraised value when deciding whether you meet the 20% equity threshold. Ask if your mortgage lender or homeowners insurance agent can provide a good recommendation on an appraiser. This may cost you a few hundred dollars to get your home appraised but can save you thousands of dollars in the long run. Before paying for an appraisal, ask the lender whether this tactic will work to get rid of PMI for your loan.
- Prepay on your loan: My husband and I are paying an extra $50 a month on our mortgage and you would never believe the dramatic drop in your loan balance over the past couple of years. This tactic alone helped us get closer to canceling our PMI.
- Remodel: Add a room or a pool to increase your home’s market value. Then ask the lender to recalculate your loan-to-value ratio using the new value figure. This is a double win, you’ll be able to enjoy the amenities and the savings on your mortgage payment. For tips on adding to your home’s value, check out our blog on “Improving Your Home’s Value”.
Other requirements to cancel PMI.
According to the Consumer Financial Protection Bureau, you must meet certain requirements to remove PMI:
- You must request cancellation in writing.
- You must be current on your payments and have a good payment history.
- You might have to prove that you don’t have any other liens on the home (for example, a home equity loan or home equity line of credit).
Private mortgage insurance adds to your monthly mortgage expenses, but it can help you get your foot in the homeownership door. When it comes to homeownership and saving money, look and see if you can eliminate that pesky PMI and save yourself a few hundred dollars a month like we did.
Until next time,