Say Good-bye to PMI: 5 Top Tips
Purchasing your first home can be very exciting, but everyone who’s been there knows there can be a lot of miscellaneous fees, expenses, and unexpected numbers involved. Most are clear-cut, such as appraisal fees and lender closing costs, however one of those additional expenses that can catch a borrower by surprise is private mortgage insurance – or PMI.
What is PMI?
To clarify, PMI is not the same as the property insurance a homeowner acquires to protect their assets against loss or damage. But depending on the terms of your loan – and down payment, specifically – it may be necessary. Private mortgage insurance isn’t for your protection, but the lender’s. It is typically required on a conventional loan if the buyer is putting less than 20% down on the home. Since the lack of funds might indicate more uncertainty to the bank or lender, they mitigate that risk with PMI.
This doesn’t reflect badly on the borrower, however. In 2019, the median down payment was just 12%, according to the National Association of Realtors. With so many people currently taking advantage of low interest rates, almost 18% of mortgages have PMI. Those homeowners paying PMI will make payments for an average of 5.5 years before getting rid of the insurance, one way or another.
So, how do you get rid of the pesky PMI that was necessary to secure your current mortgage? Fortunately, there are several ways to eliminate it, thus saving big bucks on the life of your loan. Let’s look at the most common courses of action:
Reach the Halfway Point
Regardless of increased home value or additional efforts on your part, the mortgage company is required to automatically end the private mortgage insurance halfway through the term of the loan – after 15 years of a 30-year loan, for example. This is referred to as final termination.
Pay Down Your Mortgage
As you pay down your mortgage, you may qualify to cancel the PMI by reaching 80% equity. This can be accomplished quicker by paying a little extra on your mortgage each month or applying lump sum payments from bonuses or tax refunds. In some cases, the mortgage insurance may automatically be eliminated when 78% equity is reached.
Request PMI Elimination
If you’ve been monitoring your extra payments and watching your equity increase, you may determine that you’re qualified to dump the PMI. You’ll probably need to initiate steps to request the elimination of the insurance. You may need to put the request in writing and there will likely be stipulations such as on-time and up-to-date payments, no liens, and in some cases, a new appraisal. Check with your lender what they require.
Refinance to Get Rid of PMI
Thanks to low interest rates and the assurance by the Federal Reserve that they’ll stay in that range as the country recovers economically, there has been a boon in refinancing this past year. Financial objectives vary, but refinancing is often a great way to save money on your monthly payment, reduce the term of the loan, or take cash out of the home’s equity.
If rates have dropped since you purchased and the equity has increased, refinancing can be a sensible way to eliminate the PMI as well. If the new loan balance is less than 80% of the home’s value, chances are good you’ll find a program that doesn’t require PMI. Just make sure the savings offset any closing fees that will come with a refi; less than two years in the home may make it harder to reach the breakeven point.
FHA and MIP
As we established earlier, many homebuyers aren’t able to put down a large down payment, and perhaps they have less-than-perfect credit standing, so they finance through the Federal Housing Administration – or FHA. It’s often a great opportunity for first-time buyers.
Similar to the conventional PMI charged by non-government lenders, the FHA will charge a mortgage insurance premium – or MIP – to protect their investment. The MIP is usually required for the life of the loan, however depending on when you acquired your FHA mortgage there are options to eliminate it:
- Before June 2013, MIP may be eligible for cancellation after five years, with 22% equity, and timely payments.
- After June 2013, you’ll need to refinance into a conventional mortgage with a loan-to-value ratio (LTV) of 80% or more.
Check with a lender to determine where you stand on eliminating or reducing the MIP on your federally backed mortgage.
Ready to Say Good-bye to PMI?
For many homeowners, private mortgage insurance was a small price to pay when securing their dream home. Just don’t find yourself paying more or longer than is necessary. EnTrust Funding (ETF) can help determine if it’s time to take advantage of the equity and low interest rates to save even more each month. Contact us today for timely mortgage solutions!