We all want to lower our bills. You may think that refinancing your home is the only option, but there are many ways you can lower your mortgage rate with your current lender. One way is to eliminate PMI – private mortgage insurance. But what is it and how can it be done? Let’s take a closer look at how to cancel PMI.
What Is Private Mortgage Insurance?
Private mortgage insurance is meant to protect the mortgage company should you stop making payments on your mortgage. This insurance can be costly to the homeowner. According to BankRate.com, PMI fees vary from around 0.3 percent to about 1.5 percent of the original loan amount per year, depending on the size of the down payment and the borrower’s credit score. This can be a hefty fee to pay each year. At a fee of 0.03% per year, a $250,000 loan would cost $750 a year. Wouldn’t you rather spend that money on something fun or paying down your home loan?
Why Do You Need It?
You are usually required to carry PMI when you have less than 20% for your down payment. If you refinance and you owe more than 80% of the home’s value, you will also be required to carry it.
Why Should You Get Rid of It?
As mentioned above, PMI protects the lender, not the buyer. In other words, you don’t want to pay this unless you have to. Getting rid of private mortgage insurance can save you so much money each year.
Can You Get Rid of It?
It depends. You must have 20% equity in your home in order to drop PMI. In other words, you must have paid 20% or more of your home’s appraised value. This can take a long time, especially if you’re only paying the minimum due each month.
However, if the property values in your area are rising quickly, it may be worth paying for an appraisal if the combination of the increase in value plus your current equity equals to more than 20%. Be sure to check on comparable home prices in the area to be sure before you fork out the appraisal fee.
How Do You Get Rid Of It?
Once you have paid 20% of your home’s appraised value, you can ask your bank to drop the insurance (although they may require you to pay for an appraisal to be sure the value hasn't dropped since you purchased the property). Once you have 22% equity in your home, the bank will automatically drop PMI. However, keeping up with payments, and dropping PMI as soon as you can, will save you hundreds if not thousands.
No one wants to pay more than they have to, especially when that payment doesn’t benefit them in any way. If you have 20% equity in your home, contact your bank immediately about canceling PMI.