If you bought your home with less than a 20% down payment, your lender is required to have you buy Private Mortgage Insurance (PMI). This product is strictly a risk-management product and only protects the lender if you default on your house payments. PMI is expensive, the amount will vary depending on the buyer's credit score and the size of the down payment. It usually ranges from .3% to 1.5% of the original loan amount per year. You the buyer pay the premiums, and depending on what Congress decides for that specific year, the premium payments may be deductible on your taxes. Most PMI companies make you pay monthly, however there are options to pay the PMI in one lump sum.
To see how Private Mortgage Insurance affects your monthly mortgage payment, consider the following example:
You are looking to buy a home. You currently have a credit score of 740. You find a home you love which costs $250,000. You only have $10,000 for a down payment, which is only 4% of the sales price. This leaves you with a loan-to-value of 96%. The terms of the loan is for 3.7% for 30 years. This means you will add an additional $230 a month for your PMI insurance since your down payment was less than 20%. You could cut your monthly mortgage payment by $230/month by simply getting rid of PMI. So how do you it?
It Can Be Cancelled
Once your outstanding loan balance drops to 78% of the home's original value, your lender must automatically cancel your PMI. But what happens if you want to cancel it sooner? One of the things I would suggest is to keep a close eye on your mortgage payments. Once your loan balance reaches 80% of the home's original value, you can call your lender and ask them to cancel it for you. You should always be ready to negotiate. One of the things to have in your corner is a new home appraisal. There are some lenders who will consider the new appraisal value rather than the original sales price or the appraised value when you originally bought the home. If your house is approved for more than what it was when you bought the home, you might meet the 20% equity threshold. Using the example above, assume your house was appraised today for $290,000. You would own the $10,000 you put down, plus the $40,000 it increased. This will put you at 20% equity. A home appraisal usually costs $250-$500. This may seem like a lot, but if you are paying $230 a month for PMI, this will easily pay for itself.
Make Extra Payments On Your Loan
Even an extra $50 a month can substantially reduce the term of your loan and cause a serious drop in your loan balance over time. This is the easiest, but slowest way to get rid of your PMI. Remember, you only have to reach 20% equity. The amount of time this will take really depends on how much you put down on the house. If you didn't put anything down, then this could several years. It's important you know your rights when you buy a home. Federal law requires the mortgage lender to let know you at closing how long it will take for you to reach the 20% equity threshold. This calculation assumes you will make regular monthly payments. So if you are unsure how long it will take for you to cancel your PMI, I suggest digging out your closing paperwork to check. From here, you can recalculate how long it will take you considering the extra payments every month.
Add Value To Your Home
By doing some remodeling in your home, you can increase your home's market value. Adding a room or finishing a basement could significantly improve the value of your home, which in turn will allow you to cancel your PMI. I do not recommend going out and spending a fortune on a remodel just to cancel your PMI. If this is something you have already planned or saved for, then I would suggest this route. If you have completed a remodel on your home and have not appraised your home since the remodel, I would suggest doing this. You have already spent the money to improve your home, spending a bit more for an appraisal might be worth it.
Cancelling your PMI could significantly improve your financial future. This will allow you to put more towards retirement, save for your child's future, or even save for a family vacation. If you are in the process of looking for a new home, I would suggest trying to save enough for a 20% down payment. This will save you in the long run. I always look for ways to save money – to add more income to my budget, and this is one of the ways. It's not something you think of right away when you are searching for more income, but it's something that can definitely save you a ton! If you are maxed out on your budget, don't forget to look into your PMI!
Have you cancelled your PMI? What was the experience like? Leave me comments below!