Property mortgage insurance (also referred to as “PMI”), is a type of mortgage insurance you might be required to pay for if you have a conventional loan and your equity is less than 20% of the value of your home. Essentially, it is a protective measure for your lender should you stop paying your mortgage. PMI is required for loans sold to mortgage giants Fannie Mae and Freddie Mac that do not have at least a 20% down payment or 20% equity in the case of refinance transactions. Nationally, about $1 trillion of conventional mortgages, or more than 10% of the U.S. mortgage market, is covered by PMI.
Getting rid of PMI
The recent increase in home values may greatly assist you in getting rid of your PMI. In fact, if you purchased your home prior to 2020, there is a good chance that you have seen 20% appreciation or more. In other words, simply paying your mortgage on time and living in your home for the past several years may be enough to have PMI removed. If so, this could possibly result in a monthly savings of even a few hundred dollars.
Mortgage insurance is risk-based and therefore individualized depending on the borrowers middle FICO credit score. Below are two examples of PMI premiums for a $400,000 purchase price with 10% down:
- FICO credit score of 620 (lowest allowable for mortgage insurance): $407/month
- FICO credit score of 740 (much higher credit score): $97/month
Needless to say, it could certainly be a worthwhile endeavor to explore strategies for getting rid of PMI. Below are few steps to do so:
- Make extra payments or a lump sum extra payment to bring your mortgage balance down to the point where you have at least 20% equity.
- Refinance your mortgage: If you notice that interest rates are substantially lower than when you purchased your home, you may consider refinancing your loan. In addition to lowering your monthly payment due to the lower interest rate, you may also have at least 20% equity in the home. This will allow you to get rid of PMI.
- Contact your mortgage provider to ask about removing your PMI: This will likely require that you pay approximately $600 for an appraisal to support your assertion of 20% or more equity. If your mortgage provider rejects your request to remove your PMI, you should mention that you are considering refinancing your loan elsewhere. Since the mortgage provider does not want to lose a customer, it is likely that this request will be granted.
Summary
The Homeowners Protection Act of 1998 mandates that mortgage providers remove PMI on the date the mortgage balance is first scheduled to reach 80% of the original value. Given the recent rise in home values, it is quite likely the homeowners that purchased prior to 2020 will have this equity built up. Of course, this is assuming a good payment history and no second liens on the property.
If you happen to have a Federal Housing Administration (FHA) mortgage, you may also eliminate your monthly PMI by refinancing into a conventional mortgage.
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