Buying a home with less than 20% down puts many people, who wouldn’t otherwise be able to afford it, into a house. But there is an often forgotten aspect of homeownership: private mortgage insurance (PMI). This is added to house payments when you pay less than the traditional down payment for a conventional loan.
Each month, you pay insurance, not for yourself or your home but to protect the lender. In essence, your house payment increases when PMI is applied. This amount is determined by the size of your loan and down payment.
Interested in canceling your PMI? Here are the ABCs:
Appraisal. Increasing property values are always great news for homeowners. Appreciation is one of the main reasons you invested in a home. If you have owned your home for at least two years, you could leverage this increase in value to rid yourself of PMI.
In a hot housing market like the one we find in Northwest Arkansas, you may be able to cancel years before you originally thought possible. Be sure to note any improvements you made to your home as they can also add value.
Review the rules of your PMI and talk to your lender before scheduling an appraisal as some banks might require you to use pre-approved appraisers.
Bank Refinance. This is ideal if interest rates are lower than or the same as when you took out your mortgage. Along with reducing your monthly payment, you might find that the new balance comes in under 80% of the home’s value, leading to a cancellation of your PMI.
The downside is that fees and closing costs might negate your savings. Unfortunately, we may see rates go up soon, making this option one to take advantage of sooner rather than later.
You don’t have to refinance with your current mortgage lender. Shop around for the best deal and find a lender who understands your desire to end your PMI sooner.
Contact Your Lender. You could wait for your PMI to end automatically. Mortgage servicers are required to cancel your policy, for free, when certain benchmarks are met, such as paying down your principal balance. That balance should be less than 78% of your home’s original value (defined as the lesser of the sales price or the appraised price at your mortgage’s origination). That’s known as the loan-to-value ratio, and you can get it by dividing the loan balance by the original purchase price.
If you do this calculation and find you’re close to reaching the 80% mark, contact your lender in writing and request cancellation of the PMI. Point out that you have a good payment history (no 30-day late payments in the past 12 months or 60-day late payments in the past 24 months); that you have no other liens (no second mortgages or home equity loans); and proof of the home’s current value (get it appraised by a certified home appraiser to show its value hasn’t declined).
Ask to cancel PMI earlier if you have made additional payments that reduce the principal balance of your mortgage to 80% of the original value of your home. ‘Original value’ means either the contract sales price or the appraised value of your home at the time you purchased it, whichever is lower (or, if you have refinanced, the appraised value at the time you refinanced). Your lender can require you to provide evidence (for example, an appraisal) that the value of your property hasn’t declined below the original value of the home. If the value of your home has decreased below the original value, you may not be able to cancel PMI.
Tina Sewell is a loan officer and the branch manager with Rock Mortgage in Fayetteville. She has more than two decades of mortgage lending experience. More information is available at RockMortgageLending.com. The opinions expressed are those of the author.