Along with your monthly mortgage payments, you’ll also have private mortgage insurance, an additional cost that can create financial stress. It’s part of the reason why most homeowners default on their payments.
However, there are a few ways to get out of it. As you continue to build up equity for your home, you can get rid of those extra mortgage payments by reaching certain home equity milestones or through refinance.
But we’ll discuss everything you need to know in today’s article. If you’re tired of those extra monthly costs, continue reading to learn more.
What Is Private Mortgage Insurance (PMI)?
Private mortgage insurance covers all of the lender’s bases if you default on your mortgage. Homeowners who opt for the conventional way of getting a mortgage by supplying a 20% down payment usually have to get private mortgage insurance.
It’s an extra annual cost that will vary depending on your credit score and your down payment. Then every following year, it’s recalculated depending on the size of your loan. However, PMI doesn’t apply to all loans.
For example, government-backed FHA loans or VA loans, which require a small or no down payment, have their own rules. So your loan type will determine if PMI is required or not.
Related: What Exactly Is An Underwater Mortgage?
How Does Private Mortgage Insurance Work?
As we stated above, when you take out a conventional mortgage that the federal government does not insure, PMI payments will be included in your monthly mortgage payment. You’ll have to pay this premium until you’ve built up at least 22% home equity.
For those taking out an FHA loan, you’ll need to pay a different type of insurance called a Mortgage Insurance Premium. If you put down less than 10% on your loan, you won’t be able to cancel your MIP. But if you paid more than 10%, your lender will automatically cancel the premium after 11 years.
What You Need To Know About the Homeowners Protection Act
While PMI payments can feel like they have a tight grip on your finances, you should be aware of certain protections you’re entitled to while paying the premium. The federal law, which is called the PMI Cancellation Act, protects you from excessive PMI charges.
After you’ve built up the required amount of home equity, you have the right to get rid of your PMI. Lenders will have different requirements before you’re allowed to ditch your PMI. However, once you meet the targets, they have let you end the payments.
Before signing up for a mortgage with PMI, ask for clarification of rules and a schedule of the payments. It’ll help you see how far you have to go before ending your PMI payment.
Related: 14 Mortgage Questions You Should Ask Your Lender
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How Do I Get Rid of a Mortgage?
At Mares Mortgage, we understand you’re ready to ditch the extra monthly payments and start saving money. However, you need to make sure you go about doing so the right way.
By hastily trying to get rid of your PMI, you could potentially mess up your finances. So here are four ways to help you get rid of those extra mortgage payments.
Get Rid of a Mortgage With Mortgage Refinance
If you cannot convince your lender to cancel your PMI payments, you could opt for mortgage refinancing. It’s an option usually considered by buyers looking to lower their monthly payments by extending their loan term.
However, it’s also valuable for getting rid of your private mortgage insurance. By reworking your mortgage and getting a new one, your overall balance changes. If it falls under 80%, your lender will have to cancel your PMI.
But before refinancing, calculate the closing costs of the new mortgage compared with potential savings from not having to PMI. If the costs to refinance are higher than what you’ll save, then you shouldn’t refinance.
Request Mortgage Cancellation When Your Balance Reaches 80%
If you don’t want to wait for the automatic cancellation of your PMI, you can request that your lender cancels your PMI once your loan balance equates to 80% of your home’s original selling price. You can find information about your payment scheduling on your PMI disclosure form or by requesting it from your provider.
If you want to get to the 80% requirement, you can make extreme payments if you have the extra cash to spare. By prepaying the principal on your loan and reducing the balance, you can build equity faster.
See if Your Home Gained Value
The real estate market could benefit your home in a significant way by raising its value by 20% ahead of the original schedule. So you may want to get your house appraised to see its current value.
If your loan balance is no more than 80% after the new appraisal and you’ve owned the home for at least five years, you can ask to have your PMI canceled. However, if you’ve owned the house for two years, your remaining mortgage balance cannot be greater than 75% of the home’s original value.
Final and Automatic PMI Termination
As we’ve mentioned, even if you don’t request PMI cancellation, an automatic date gets issued for when your balance is supposed to get to 80%. To have your PMI ended then, you need to be current on your payments.
You can also stop your PMI payment at the midpoint of your loan’s length term. So if you had a fixed-term loan of 20 years, you could cancel the premium once ten years have passed. But you need to be current on your payments.
Related: How Long Does It Take To Close On a Home? A Complete Guide
Let Mares Mortgage Help You Land Your Next Property
Whether you’re buying a new home or refinancing on a new property, let Mares Mortgage help you with all of your mortgage needs. We’ll get you a loan approval letter in minutes to move your application along. Also, we’ll talk you through the different loan options to make sure you’re paying the most reasonable price.
Are you ready to land your dream home? Contact Mares Mortgage today to get started on your loan application!