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If you’re a homeowner who purchased your property with less than a 20% down payment, chances are you’re familiar with private mortgage insurance (PMI).
You’ve seen how PMI can significantly inflate your monthly mortgage costs. Or if you’re a new home buyer, you may be already planning how to work around it.
But don’t fret—this guide is here to illuminate the path to PMI freedom.
We’ll explore how to get rid of private mortgage insurance, why it’s required in the first place and everything you need to know about managing PMI.
Say goodbye to those extra costs and hello to financial empowerment.
What is the purpose of private mortgage insurance (PMI)?
Private mortgage insurance, commonly known as PMI, is a financial safeguard designed to protect lenders in case a homeowner defaults on their mortgage payments.
Let’s clarify something right off the mark: PMI is not intended to benefit the homeowner directly but rather serves as a risk mitigation tool for lenders.
When you buy a home with a down payment that’s less than 20% of the property’s purchase price, lenders typically require you to pay for PMI.
This insurance policy acts as a safety net for the lender, assuring them that their investment is protected.
Purpose of PMI
Without PMI, lenders might be hesitant to approve loans for buyers who can’t afford a substantial down payment. In the lender’s eyes, a smaller upfront investment can increase the likelihood of default.
PMI provides lenders with the confidence to offer mortgages to a broader range of borrowers, ultimately promoting homeownership.
How PMI is arranged and provided
PMI is typically arranged and provided by private insurance companies.
These insurers offer various PMI policies to lenders, who then require borrowers to pay the premium as part of their monthly mortgage payments.
Homebuyers and homeowners need to understand that the cost of PMI can vary depending on factors such as:
- Your credit score
- The size of your down payment
- The lender’s requirements
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Understanding loan-to-value ratio (LTV) and combined loan-to-value ratio (CLTV)
To comprehend PMI fully, you must grasp the concepts of loan-to-value ratio (LTV) and combined loan-to-value ratio (CLTV). These ratios are pivotal in determining whether you’ll need to carry PMI and how much it will cost.
Definition of LTV and CLTV
LTV ratio represents the ratio of your mortgage amount to the appraised value of your home. It’s expressed as a percentage.
For instance, if you have a $180,000 mortgage on a home appraised at $200,000, your LTV ratio would be 90%.
CLTV ratio, on the other hand, takes into account multiple loans on the same property.
If you have a second mortgage or a home equity line of credit (HELOC) in addition to your primary mortgage, CLTV considers the total of all outstanding loans divided by the appraised value of your home.
Ways to get rid of PMI
Private mortgage insurance (PMI) can be a significant financial burden, but fortunately, there are several effective ways to eliminate it.
Pay down your mortgage balance
This is the straightforward one.
As you make regular mortgage payments, a portion goes towards paying down the principal, which, in turn, lowers your LTV.
Once your LTV ratio reaches 80% or lower, you can typically request PMI removal.
Request PMI cancellation when the mortgage balance reaches 80%
Under the Homeowners Protection Act of 1998, lenders are required to automatically terminate PMI when your LTV ratio drops to 78%.
This is an automatic process that occurs without any action required on your part. Keep a close eye on your mortgage statements to ensure timely termination.
You can also proactively request PMI cancellation when your LTV reaches 80%.
Be sure to check with your lender for their specific requirements and procedures for cancellation.
Refinance to eliminate PMI
If your financial situation allows, explore mortgage refinancing as a means to eliminate PMI.
Refinancing can offer lower interest rates and offer the opportunity to reset your loan terms to potentially remove PMI altogether.
If your home’s value has increased significantly since you purchased it, you may be eligible for a new mortgage with a lower LTV ratio, thus eliminating the need for PMI.
However, refinancing involves costs and considerations, so it’s essential to assess whether it makes financial sense for your situation.
Get a new appraisal
If you believe your home’s value has increased substantially since your purchase, consider getting a new appraisal.
A higher appraised value can result in a lower LTV ratio, potentially making you eligible for PMI removal.
Consult your lender about their appraisal requirements and whether they accept outside appraisals.
Tips for removing PMI
Now that we’ve explored the various ways to remove PMI, let’s delve into some essential tips to help you navigate this process smoothly.
Know your lender’s PMI removal rules
Each lender may have specific rules and procedures for PMI removal. It’s essential to understand your lender’s policies, including the criteria for cancellation, any fees involved, and the necessary documentation.
Maintain a good payment history
Consistently making your mortgage payments on time and in full is essential. A strong payment history not only builds your credit but also demonstrates financial responsibility, which can be beneficial when requesting PMI removal.
How to get rid of private mortgage insurance: the bottom line
In the world of homeownership, every penny saved counts, and PMI is no exception.
For many, PMI is an unavoidable cost, especially if you can’t make a sizable down payment when purchasing your home.
However, as this comprehensive guide has shown, there are practical strategies to shed this financial burden.
Understanding the various methods for PMI removal, from paying down your mortgage balance to refinancing, empowers you to make informed decisions that put money back in your pocket.
Get started on PMI freedom with Homefinity
Remember, it’s essential to be proactive in your pursuit of PMI removal, familiarize yourself with the rules and regulations, and maintain a strong payment history.
Should you have any doubts or need personalized advice, get started with a free conversation with a trusted mortgage professional at Homefinity.
We can provide tailored guidance to help you on your journey toward a PMI-free homeownership experience.
With diligence and the right knowledge, you can achieve financial freedom and enjoy the full benefits of homeownership.
Whether buying for the first time or refinancing, get a free quote from Homefinity today.
Photo by Antoni Shkraba