If you’ve bought a house, or you’re thinking about buying a house, you’ve probably already thought about PMI costs.
Many homebuyers pay PMI either because of the kind of loan they have or because they had less than a 20% downpayment.
Mortgage insurance has a purpose. It’s great for getting people who don’t have a lot of cash on hand into a house. But it does add cost to your monthly payment.
Thankfully, if you have a house loan, there are ways to get rid of PMI.
PMI stands for private mortgage insurance. PMI is typically required for conventional loans without a 20% down payment.
The lender adds PMI to your monthly mortgage payments. You don’t get a refund on payments made to PMI, even once you’ve paid off the house. Mortgage insurance is only for the lender’s protection.
While it may seem counterintuitive to pay more every month without it going to your overall premium, it can be for the buyer’s benefit. Because of PMI, conventional loans only require a 3% downpayment. That means, more people can buy homes.
Most new home buyers don’t have 20% for a down payment. But PMI makes it so that they can still buy a home.
Most homeowners pay $100 to $300 per month for PMI. A general rule for calculating how much you’ll pay in PMI is to expect to pay between 0.5% and 1% of the mortgage every year.
For example, expect to pay $2,000 a year in PMI for a $200,000 house. The more expensive of a house you purchase, the more your PMI will be.
While PMI allows people to afford a house without having a large sum of money for a downpayment, no one wants to pay it forever. Canceling PMI means having lower monthly house payments and freeing up more income.
Legally, convention lenders have to automatically cancel PMI once you’ve reached 20% equity on your home. That means you’ve made your payments and now you’ve technically put 20% into the home mortgage.
Many people don’t realize that you can request from your lender that they not require you to pay PMI anymore. This is only possible once the home mortgage gets paid down to 78%.
You can begin the request for the removal of, or lower PMI, when you bear 80%. To make that request, you’ll need a good record of always paying your mortgage on time, no other outstanding debts or second mortgages, and a recent appraisal showing the value of your house.
When you refinance your mortgage, if the appraisal comes back higher than you paid for the house, then you may qualify to get your PMI removed. For government-backed, non-conventional loans, you’ll have to refinance to a conventional loan to get rid of PMI.
Refinancing always requires a home appraisal. If your home value has gone up, and it’s appraised at higher than your mortgage, you could get rid of PMI that way. If what’s left of your mortgage is 80% of your home’s appraised value, then you can stop paying PMI.
Remember that with refinancing, you’ll have to pay closing costs on the house again. So, make sure your gains outweigh loss when refinancing.
If you’ve updated the bathroom and kitchen of your home, and see the neighborhood value going up, chances are that your home value has already risen.
Before ordering a new appraisal from the lender, make sure that your home has gone up in value. To get a good idea of if your home value has gone up or not, do some practical steps.
Once you prove that the property value has gone up enough so that your current mortgage amounts to 80% of the home’s worth, the lender will cancel PMI.
Sometimes you can avoid PMI by taking out a second loan to cover your downpayment, known as a piggyback. If this sounds like a good option for you, first weigh the pros and cons.
Second loans often include higher interest rates and sooner due dates. This option works best for someone who knows they’ll be able to pay off the piggyback loan before the costs outweigh the benefits.
So, expect to do some math before figuring out if this is a good option for you. Before making any decisions on a piggyback loan vs. a conventional PMI loan, check the interest rates and total costs of each.
Lenders almost always require an appraisal, whether you’re buying for the first time or refinancing an existing mortgage. The appraisal is simply a way for you to prove the value of the home. But, it’s not always necessary.
An appraisal waiver:
Getting an appraisal waiver is always something to consider.
Now that you know more about getting rid of PMI, you can feel comfortable going through the process. Contact Marketplace Mortgage for a free consultation on getting rid of PMI before purchasing a house or when refinancing a house.