PMI can be expensive. At anywhere from 0.5% to 1.5% of your loan amount, it can cost you hundreds, if not thousands of dollars per year.
It also equals a higher monthly payment, it makes it harder to save up, and it means less cash flow on the whole — all of which can add serious financial stress to your household.
Fortunately, if you have a conventional loan, mortgage insurance isn’t forever. In fact, there are several ways you can cancel it, thus lowering your annual and monthly mortgage costs along with it.
Want to get rid of your costly PMI? Here are six ways you can do it:
Your lender is actually required to cancel your PMI once you reach a 78% loan-to-value ratio (meaning you own/have paid off 22% of the home’s total value). When you hit this point, your payment should adjust automatically.
Though lenders have to drop PMI at 78% LTV, they can drop it at 80% — it just won’t happen automatically. Instead, you’ll have to formally request a cancellation through your lender. You’ll just need to keep an eye on your PMI schedule or use an amortization calculator to determine when you’ll hit that 80% mark, then file a written request with your mortgage lender (some have their own forms for this, so check with a customer service rep just to be safe).
In order to qualify for cancellation, you’ll need to be current on your payments for at least the last year, and you will also have to provide proof of your home’s value, either via an appraisal or, in some cases, a broker’s price opinion. Check with your lender to see what valuations they accept.
A quick note: Sometimes, the cancellation process can take a while, so you might want to file your paperwork a few months ahead of time just to be safe.
Is it obvious home values are up in your neighborhood? Are houses selling like hotcakes? Is the community booming? If so, you might consider getting an official appraisal to gauge your home’s current market value.
If it’s gone up considerably, it will send your LTV down in step. If that LTV drops low enough, you might be able to cancel your PMI sooner than you think.
Here’s an example: Say you bought your home for $200,000 and have $170,000 left on your loan. That’s only an 85% LTV on its face and would not qualify you for PMI cancellation. If a new appraisal put your home at a $220,000 valuation, though, you’d instead have a 77% LTV and could request cancellation from your lender.
If you’re sure your home has gone up in value and interest rates are low, you might consider refinancing instead of just getting an appraisal. With a refinance, you can leverage that increased home value (which would put you at a lower LTV), and get a new loan with both lower interest rates and no PMI costs.
This one-two punch could mean a significantly lower monthly payment or, if you decide on a shorter payment term, maybe a quicker pay-off period and a faster track to mortgage freedom.
If you have an FHA loan, refinancing is often the only way to get rid of those mortgage insurance premiums. Because most FHA loans require lifetime insurance, you’ll need to refinance into a conventional loan to enjoy a mortgage payment without PMI.
Getting a holiday bonus or hefty tax refund this year? Put it toward your mortgage loan balance. You could also commit an extra $100 per month if finances permit. The more you can put toward your balance, the closer you’ll be to that 80% LTV mark (when you can effectively cancel PMI with your lender.)
If home values aren’t going up in the neighborhood, then take matters into your own hands. Consider upgrading or remodeling your home, adding a new amenity like a pool or deck, or updating your systems, roof, or other major features. These can all add marked value to your home and thus move you closer to that 80% LTV.
Want to learn more about getting rid of PMI? Just want to avoid mortgage insurance altogether? We can help. Get in touch with a SnapFi Mortgage Advisor today for guidance.