If you bought a house with a down payment of less than 20%, your lender required you to buy mortgage insurance. The same goes if you refinanced with less than 20% equity.
Private mortgage insurance is expensive, and you can remove it after you have met some conditions.
How to get rid of PMI
To remove PMI, or private mortgage insurance, you must have at least 20% equity in the home. You may ask the lender to cancel PMI when you have paid down the mortgage balance to 80% of the home’s original appraised value.
The process to do so is straightforward. Get an estimate of value from a local real estate agent or loan officer. Online home valuation websites can be inaccurate, so be careful with those.
See if you have around 20% equity based on your home’s estimated value. Be sure to add closing costs onto your existing loan balance if you do not wish to pay them out of pocket.
Then, reach out to your lender and begin the refinance process!
Refinancing to get out of PMI
When mortgage rates are near record lows, as they are now, refinancing can allow you not only to get rid of PMI, but you can reduce your monthly interest payments. It’s a double-whammy of savings.
The refinancing tactic works if your home has gained substantial value since the last time you got a mortgage. Let’s say you bought your house 3 years ago for $100,000, and you borrowed $90,000. That means you have a loan-to-value ratio of 90%, and you pay for PMI.
Three years later, you’ve made all your payments and you have chipped away at the loan balance. Now you owe $85,000. And your home’s value has gone up — now it can be appraised at $112,000. Its value has grown 4% a year.
At this point, you owe $85,000 on a $112,000 house. This means you owe 76% of the home’s value — well under the 80% loan to value that triggers the need for mortgage insurance. Under these circumstances, you can refinance int
o a new loan without having to pay for PMI.
Here’s a great piece from Craig Berry at the Mortgage Reports for those who have FHA loans and are paying mortgage insurance (MIP). He outlines the benefits of the FHA loan – and examines why right now is a great time to move to a conventional loan.
Now is the time
With rates near historic lows and home values rising consistently, now is a fantastic time to look at refinancing away that PMI. I’d be happy to sit down with you and talk about alternatives and programs that could fit you needs!
The views expressed are my own and do not necessarily reflect those of American Financial Network, Inc.
