The Truth About Private Mortgage Insurance!
Did you know that not all loans require a 20% down payment? Depending on the type of mortgage and the type of borrower, the initial down payment on a home may be as low as 3.5% of the purchase price. However, with the lower down payment comes an added monthly mortgage insurance premium called PMI (Private Mortgage Insurance). This is an insurance that protects the lender in the case the borrower defaults on their loan. The lender requires PMI when the down payment is not at least 20% of the purchase price. This makes the borrower a greater risk to the lender and therefore requires the additional monthly PMI.
Paying extra on your mortgage certainly isn’t enjoyable; however, it does allow borrowers who wouldn’t be able to afford a higher down payment the ability to buy a home. The good news is there are a few ways to get rid of the private mortgage insurance on most loans.
1. Borrower-requested cancellation
Once you feel you have reached 20% equity in your property, you can ask your lender to cancel PMI on your property. They may require a new appraisal to verify the value of the property before they will consider removing the PMI. However, there are many ways to build equity faster, the simplest of which is to pay extra towards your principal balance each month when your mortgage payment is due.
Another option is home improvements. If chosen wisely, this may be another way to get to that 80% loan-to-value ratio faster, although your loan will stay the same your home will increase in value. The difference between your loan and the new value is equity in your pocket. Just remember that before the lender will eliminate PMI, they’ll require a home appraisal. The borrower will be required to pay for the appraisal which typically costs about $400-$500.
2. Automatic termination
If you can’t afford extra payments, or your lender rejected your cancellation request, never fear, in a few years your private mortgage insurance will automatically terminate. If your initial down payment was the minimum required when you purchased the home it will typically take about 5 years to pay the balance down to 80% of the value.
The Homeowner’s Protection Act (HOPA) makes it illegal for lenders to unnecessarily charge borrowers mortgage insurance. Typically, this means that when your principal loan balance is paid down to 78% of the original value, lenders will automatically end the PMI.
The only exception to that rule is the FHA loan. Unfortunately FHA does not allow the borrower to remove PMI. It is required on the loan for the life of the loan.
Some lenders do offer creative lending solutions to help avoid the PMI. Otherwise start saving! The sweet spot to avoid PMI is a 20% down payment.
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