When purchasing a home with a down payment of less than 20 percent you will be required to purchase private mortgage insurance (PMI). Based on the loan to value ratio (LTV) of your home PMI applies to loans with the less than the traditional 20 percent down, which have an 80/20 loan value. This means the buyer has 20 percent equity walking in the door and the lender has that equity cushion in the case of default.
PMI covers the lender in the event that the borrower defaults on the loan. Reluctant to take a risk on a property where the owner has less than 20 percent equity, lenders use PMI to make lower down payment loans available to borrowers. These loans often have LTV’s of 97/3, when a loan is offered with a three percent down payment requirement.
In addition to your monthly payment, PMI may increase the cost of your mortgage to a point that you don’t want to bear. If you currently own a home with PMI, there are ways to dump it, relieving yourself of the monthly cost.
Do you know your Loan to Value Ratio?
Used as the basis for decisions about your loan, along with your credit score and ability to repay a loan, the loan to value ratio (LTV) of your home is what PMI hinges on. Any loan with equity of less than 20 percent is subject to PMI unless you are eligible for a VA Loan or USDA rural development loan for those in rural areas.
Can refinancing your home end PMI?
If you are currently paying PMI on your mortgage, refinancing may be a viable alternative to dump it, freeing up more of your monthly income for other pursuits. If today’s interest rates are even a quarter of a percent lower than your current loan, it is a possible solution if you have owned your home for two or more years.
Not the best way to rid yourself of PMI when you consider the fees of refinancing but it is a solution. If you find that you can dump your PMI and lower your monthly payment using this method, then this option may work for you.
Can a second mortgage help you dump PMI?
A second mortgage may help you dump your PMI and some borrowers use what is called a piggyback or 80-10-10 mortgage, allowing them to get around this extra payment. An 80-10-10 loan works like this:
- You acquire a loan for 80 percent or less of the home’s value, which eliminates the PMI.
- The first ten percent reflects a the amount of the purchase price that will be covered by a home equity line of credit, second mortgage or home equity loan.
- The last ten percent of this equation is what the homeowner will need to put in as a down payment.
You need to keep two things in mind when considering a piggyback loan. Although you will save paying PMI, interest rates on second mortgages and lines of credit are higher than they are on primary mortgages and the interest paid may negate the contortions necessary to dump PMI. If you do take this route to rid yourself of PMI, get the second mortgage paid off as soon as possible. The second thing is that a piggybank loan requires very good credit and is not an option open to everyone.
Can you ask your Lender to remove your PMI?
If your loan balance falls to 78 or 80% of the value of your home, you can request that your lender remove it. The criteria that will need to be met, follows:
- The request of removal of PMI must be writing.
- You must prove that that the title is clear with no liens or lines of credit against its value.
- You may be required to get an appraisal to determine the current value of your home.
- You must have a solid payment history and be current on your payments.
Lenders are required by law to tell you, when you close on your home, the duration of the PMI payments and when you should have sufficient equity in your home to dump them. They must also provide to you, annually, a statement with who to call to cancel your mortgage insurance.
Are there other ways to dump your PMI?
Yes, there are and they may be the best options when you want to eliminate the cost of PMI.
- If you have owned your home for over two years and home prices in your area have increased you can pay the cost of an appraisal, $300 – $500, to determine if you have met the 20 percent equity threshold required to dump your PMI.
- You can remodel your home or build an addition to increase the market value of your home. After the dust has cleared from construction, you can get an appraisal to see if you meet the threshold of 20 percent equity.
- A monthly prepayment of as little as $50 per month toward your loan will help you drop your balance owed, more quickly. If you can pay more, you will quickly meet the 20 percent equity threshold required to dump your PMI.
Are you ready to dump your PMI?
The best way to dump PMI is to purchase a less expensive home, with a lower down payment. If you find that you can’t, then get as close as you can to the 20 percent equity threshold with your home purchase so that you can pay it down quickly. Anyway, you go, dumping your PMI as soon as possible will save you thousands of dollars over the life of your loan.
2 Point Highlight
When purchasing a home with a down payment of less than 20 percent you will be required to purchase private mortgage insurance (PMI).
Lenders are required by law to tell you, when you close on your home, the duration of the PMI payments and when you should have sufficient equity in your home to dump them.
