- Most mortgage lenders typically require a 20% down payment, but many individuals opt for a lower down payment, often around 10%. This allows them to retain more cash for potential expenses like home repairs, interior renovations, or unforeseen emergencies.
- However, borrowers who put down less than 20% are usually obligated to pay for Private Mortgage Insurance (PMI). PMI serves as a safeguard for the lender in the event the borrower defaults on the loan.
- The cost of PMI can fluctuate, ranging anywhere from 0.3% to 2% of the outstanding mortgage balance, with the specific amount contingent on various factors.
What is PMI?
PMI, or “private mortgage insurance”, is a type of insurance that protects a mortgage lender when the borrower defaults.
This insurance is only applicable to homebuyers who don’t pay the 20% down payment because the lender considers them risky.
PMI is a significant cost to homeowners because borrowers often pay an additional $30 to $100 every month for a loan principal of $100,000.
The amount of PMI that a borrower pays depends on:
- Their credit score
- Their down payment amount
- Their loan term
Although costly, PMI allows homeowners to acquire houses with a low down payment.
While PMI payments can be expensive in the long run, borrowers don’t have to be stuck with PMI payments forever.
When Can I Get Rid Of PMI?
A mortgage borrower has the right to ask for PMI cancellation when the equity in their home is greater than 20% of the property value.
Three Methods to Eliminate PMI
1. Pay Your Mortgage As You Wait For Automatic Cancellation
The lender should automatically cancel your private mortgage insurance when:
- The loan balance is 78% or less of the current appraisal value of the house.
- Your payments are halfway to the amortization schedule. For instance, if your loan term is twenty years and you have paid for ten years, the servicer/lender can cancel the PMI.
However, these two options only apply when you have been making your mortgage payments on time.
2. Request for PMI cancellation
You have the right to ask the lender for PMI cancellation once the loan balance is equivalent to 80% of the original value of your property. In other words, once you have paid enough into the home to reach 20% equity, you can can ask the lender to remove PMI.
Here are some tips:
- Make the cancellation request in writing.
- Ensure you have a good loan payment history. Lenders consider borrowers with late payment cases as risky, and this may prevent the lender from canceling the PMI.
- Ensure that you don’t have junior liens, such as a second mortgage. Your lender may conduct background research to determine if you have another mortgage.
- Know the current value of your home. You may need to do a home appraisal to determine the current value of your house. Verify the requirements with your lender and then send Castle Black Appraisal a quote request! If the value of the house has increased, the chances of cancellation will be higher.
- Your amortization form should help you determine when your loan balance will be equivalent to 80% of the home value. You can also ask your lender to tell you when you will get to 80%.
3. Refinance the Mortgage
Although the current 2023 rates are not favorable for this method, refinancing the mortgage one more way to get rid of your PMI. This method works well if your property has increased in value. It would be beneficial to use a refinance calculator to ensure the fees and closing costs for the new loan would not exceed the amount you would save by canceling the PMI.
PMI Frequently Asked Questions
What Can I Expect During The Appraisal Process?
Castle Black Appraisal will coordinate a time for the walk through and start to gather the relevant information on your property right away.
Don’t worry about cleaning the house from top to bottom; appraisers are concerned with the bones of the house and external factors. The location of the home, any external influences, amenities, and current condition of the interior and exterior of the house will play a part in determining the value of the property.
During the appointment, I will take many, many photos of the exterior and the interior. I will also use an app to create a floor plan of the gross living area. Spaces which are accessible from the main portion of the home and also heated/cooled can be considered in overall gross living area. However, an enclosed back porch would simply be an additional line item on the report.
What Is My House Worth?
The fair market value of your home will be determined by careful analysis of market trends and similar properties that have recently sold in the area. I research the MLS and contact real estate agents active in the local area to find out about any and all sales activity.
Will I Get A Copy Of The Real Estate Appraisal?
The client (possibly the lender in this situation) will get a copy of the appraisal. Legally, an appraiser can only disclose appraisal reports to the client. In this case, you may request a copy from the lender directly.
However, if the lender allows you to order your own appraisal for the purpose of cancelling PMI, you will receive a copy of the appraisal report.
If your lender will accept an independent appraisal, please submit the form below for a quote today!
