If you put down less than 20 percent of the sale price when you purchased your home, you were required to purchase private mortgage insurance (PMI). According to Investopedia, PMI is between 0.5 percent and one percent of your original mortgage sum per year. For example, if you have a mortgage of $175,000 and a PMI rate of one percent, it will cost you $1,750 per year or around $146 per month.
PMI is intended to protect the lender in the event you default on your payments — it doesn’t offer you any protection. That’s why it’s understandable if you want to cancel it sooner rather than later. Once you’ve achieved 20 percent equity in your home, there are some ways you can address this:
- Wait until your PMI is automatically canceled. When you achieve 22 percent equity in your home, your mortgage lender is required by law to cancel your PMI. The same applies when you reach the midpoint of your mortgage term — so at 15 years if you have a 30-year mortgage.
- Apply for early cancellation. When you’ve achieved 20 percent equity in your home, you can ask the lender to cancel the PMI. NerdWallet advises that you’ll need a good payment history and an appraisal to prove that the value of your property hasn’t diminished. In addition, your mortgage must be the only debt tied to the property, so there can’t be any other liens such as a second mortgage, line of credit or home equity loan.
- Have your home reappraised. To have your PMI canceled based on a reappraisal, you must have owned the home for two years or more and have a 75 percent loan-to-value (LTV) rate or have owned the home for at least five years and have an 80 percent LTV. SF Gate reports that a lender considers you a lower risk if your home’s current value is at least 20 percent greater than the loan balance. That means that if your property has increased in value — due to improvements you’ve made, rising home values in your neighborhood or both — you might meet the requirements for PMI cancellation. Note that you’ll have to pay for the appraisal yourself, which usually costs approximately $350.
- Refinance your home. According to Bankrate, refinancing your home can offer a great way to both cancel your PMI and lower your interest payments — so long as mortgage rates are low. This strategy is only effective if your property has gained in value since you purchased it. For instance, if you bought your property five years ago with a down payment of 10 percent and your home’s value has risen 17 percent since then, your equity in the home is more than 80 percent. This means you can refinance without the burden of PMI. Keep in mind that you’ll need to budget for the costs of refinancing, which involves an application fee, a title search, title insurance, legal fees, origination fees and points.
PMI is a financial product that can help you obtain financing for your home when you don’t have sufficient cash down. Nevertheless, there’s no reason to pay it if you don’t have to. So, take the time to discuss these strategies with your lender and determine which option is best for your financial scenario. And by canceling your PMI, you’ll have more money left to spend on other things — including maintaining or upgrading your property.
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