If you used a conventional loan to purchase your home and had a down payment of less than 20 percent, then you’re paying private mortgage insurance (PMI). As Investopedia explains, this insurance protects the lender, but you’re the one who pays the premium each month, and it can drive up the cost of your mortgage payment significantly. Thankfully, you don’t have to pay PMI on a conventional loan forever. When does PMI go away?
When Does PMI Go Away?
Also known as the PMI Cancellation Act, the Homeowners Protection Act was designed to address the difficulties homeowners were having with canceling PMI. It set standards for notifications and cancellation of these policies and created several methods that could be used to end them in various situations. When does PMI go away? Homeowners who want to get rid of PMI can use a variety of approaches.
Wait for PMI to Be Terminated Automatically
If you do absolutely nothing beyond keeping current with your payments, then there are two ways that your PMI payments can end automatically, according to the Consumer Financial Protection Bureau:
- Automatic PMI Termination. Your loan servicer must end PMI on the date when your principal balance is scheduled to reach 78 percent of the original value of your home. However, if you aren’t current on your payments, PMI will continue until you bring your payments up to date.
- Final PMI Termination. Your loan servicer must end PMI the month after you reach the midpoint of your loan’s amortization schedule. In other words, PMI should be terminated when you are halfway through your loan’s lifespan. Again, your payments must be current for PMI to be terminated.
Request PMI Cancellation at 80 Percent
While lenders must drop PMI when your loan’s principal balance is scheduled to reach 78 percent, you can actually save money by requesting that they take action sooner. In fact, if property values have gone up, you’ve made improvements to your property that have increased its value, or you’ve made extra payments to build equity, then you could save a substantial sum by requesting an early PMI cancellation when you have 80 percent equity in your home. When should you make your move? Using a mortgage amortization calculator to determine when you’ll hit 80 percent. However, if you’ve made improvements or live in an area where property values have soared, the rise in value may be enough to help you get rid of PMI. Of course, with this approach, you can’t wait. You’ll need to make a move if you want to see the PMI canceled. As HomeLight reports, you’ll need to do four things to make your case:
- Make a written request. A verbal conversation won’t cut it. Send a written request several months before you’re due to hit 80 percent to get the process started.
- Have a solid payment history. PMI is all about protecting the lender from a defaulting borrower, so a solid payment history is essential if you want to cancel this insurance early. You must have no payments that were 30 days late in the last year and no payments that were 60 days late in the last two years.
- Present proof of value. A home appraisal at your expense may be required. Some lenders will only accept valuations from certain professionals, so you may want to check with your lender before seeking out the appraisal.
- Have no other liens. There can be no other debts against the property.
Refinance to a New Loan Without PMI
When you refinance, you replace an existing mortgage with a brand-new home loan. As NerdWallet points out, it can be a handy way to snag a lower interest rate, secure better terms, and get rid of PMI.
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