Many people think that once they have closed on a house, mortgage payments and taxes are the only mortgage related expenses they will have. However, if you made a small down payment that’s more in the 5% range, it’s likely that you will be paying PMI (private mortgage insurance). Private Mortgage Insurance is a risk-management product that protects lenders against loss if a borrower (buyer) can’t make a payment. Most lenders require PMI when the buyer puts down less than 20% of the home’s value. This allows borrowers to make a smaller down payment as low as 3%! The borrower pays PMI monthly until they have accumulated enough equity in the home that the lender no longer considers them high risk. If you are wondering how to get rid of mortgage insurance or how to avoid paying it in the first place, read below!
Buy A Cheaper Home
Buying a cheaper home will make it easier to be able to save and put down a 20% down payment on the house, thus not having to pay mortgage insurance. Even if you cant save enough to put down 20%, buying a cheaper house, will give you a lower PMI and you will be able to pay it off more quickly.
Take Out an 80-10-10 Mortgage
In an 80-10-10 mortgage or also known as a piggy back mortgage, the buyer agrees to a mortgage/takes out a loan through a lender that amounts to 80% of the home’s value, makes a 10% down payment and takes out an additional loan for the 10% left of the home’s value.
Calculate Your LTV
If you already have PMI in your mortgage, there are a couple ways you can get rid of it. One of the first things you have to understand is your home’s LTV or loan-to-value ratio, which is the difference between the amount of your loan and your home’s current value. To calculate your home’s LTV, divide your loan amount by the value of your house. If your LTV is .8 (80%) or lower, PMI is no longer a requirement.
Add Value To Your Home
In order to be able to get to this point you have to keep making your mortgage payments as planned, but know that this will take a few years. If you are doing well financially, making extra payments will help you get to the 80% or lower point much sooner. If you are lucky and happen to live in an area where your home’s value is increasing or you happen to make some major remodels to your home that increase its worth, this could help you get there sooner. If you think you are at a point where your PMI can be cancelled, get an appraisal of your property and if your LTV is 80% or lower, ask your lender to cancel your PMI.
Automatic PMI Cancellation
The Homeowner’s Protection Act says that a lender is legally required to cancel your PMI if you haven’t missed any mortgage payments, you have paid down your mortgage to 78% of its original value and if you don’t have an FHA loan. This generally applies to homes that were purchased after 1999.
Hope this information will help you get rid of your existing mortgage insurance (PMI) or help you avoid paying it as a whole! Make sure to share!