With a conventional mortgage, you also have to buy private mortgage insurance (PMI), especially if you make a payment of less than 20 percent. For example, if you purchase a home for $400,000, you will have to make a down payment of $80,000 if you wish to avoid PMI. On the other hand, if you can’t pay 20 percent down, you will have to buy private mortgage insurance. So is there any way to remove mortgage insurance?
Why Private Mortgage Insurance?
Private mortgage insurance (PMI) protects the private lender. It cushions the lender from the loss if you, the borrower, cannot repay the conventional loan. In other words, it provides extra financial protection to the private mortgage lender against a potential default.
The amount of private mortgage insurance is determined when the mortgage is finalized. It is most often between 0.58 percent and 1.86 percent. However, the exact percentage for mortgage insurance varies depending on your credit score and down payment. If you have a good credit score, you can qualify for low PMI.
Ways to Remove Mortgage Insurance
There are multiple ways to get rid of mortgage insurance, such as:
Automatic Cancellation
According to the PMI Cancellation Act or the Federal Homeowners Protection Act, the lender is required to cancel private mortgage insurance automatically when you get 22 percent equity in your house or when the principal balance is 78 percent of the original value of your home.
Another situation where automatic cancellation is liable is when you (the borrower) are halfway through the loan’s full term, such as 15 years into a 30-year mortgage.
Submit Your Request for Cancellation of PMI
Once your principal value is 80 percent of the original home’s value, you can request your lender cancel your PMI. However, here your eligibility for cancellation may be influenced by whether the value of your home is appreciated or depreciated over time. This means if the value of the home increases, your PMI can cancel sooner than expected. But if it decreases, then you will have to wait longer for PMI cancelation.
Furthermore, before canceling private mortgage insurance, the lender will get the home’s current market value by a Broker Price Opinion. However, they may reject your request if there is a decrease in the home’s value since you purchased it.
Get a New Appraisal
Another quick way to remove mortgage insurance is to get a new appraisal if you think the value of your home has increased from when you took out the mortgage. Please note that you will have to get this appraisal at your own expense, costing several hundred dollars. Therefore, first, get the lender’s confirmation that they will accept your real estate broker’s evaluation.
Refinance Mortgage
Refinancing is an excellent move if you are confident that the value of your house is good enough to get a new mortgage with at least 20 percent equity. This will help you get rid of private mortgage insurance.
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