You’ll need to pay PMI if you provide a down payment of less than 20% of a home’s purchase price when you take out a conventional mortgage. Conventional mortgages are any home loans not insured by a government body.
Homeowners don’t like PMI, partly because it doesn’t protect them. Instead, this insurance protects the lender in case you stop making your mortgage payments.
PMI can also be expensive. It varies, but you’ll usually pay from $30 to $70 a month for every $100,000 that you borrow. In other words, if you take out a $300,000 mortgage, PMI could cost you an extra $90 to $210 per month.
Fortunately, PMI isn’t permanent. It will disappear before you pay off your mortgage loan.
How to get rid of PMI
One of the most common ways to eliminate PMI is through automatic termination.
Under federal law, your lender must cancel your PMI payments once your mortgage loan balance reaches 78% of your home’s value when you bought it. This means if you spent $300,000 on your home, your lender must cancel your PMI when your mortgage balance hits $234,000.
The best thing about this? You don’t have to do anything except make your mortgage payments on time. As you pay down your mortgage, you’ll hit the 78% mark, and your lender will cancel PMI without you taking any further action.
Requesting early cancellation
But waiting for automatic cancellation isn’t your only option for eliminating PMI.
You can ask your lender to remove PMI when your loan balance reaches 80% of your home’s original purchase price. To do this, you’ll contact your loan servicer and formally request cancellation. Your lender might order an appraisal to make sure that your home’s value has not declined since you purchased it.
There are certain requirements for canceling PMI at this level. Most lenders will require that you have a good payment history. This means no 30-day late payments in the last year or 60-day late payments in the last two years.
You might not think that requesting an earlier cancellation of PMI will make much difference. After all, the 80% threshold for requesting cancellation isn’t much higher than the 78% mark for automatic cancellation.
But canceling when your mortgage balance reaches 80% of your original purchase price can save you thousands of dollars in extra mortgage payments, depending on the size of your loan and the amount you pay in PMI each month. It’s important, then, to keep track of your loan-to-value ratio and to request cancellation of PMI as early as you can.
