What is Private Mortgage Insurance (PMI)?
Private mortgage insurance is an insurance policy, paid for by a home buyer, that protects a lender’s financial interests should a home buyer default on their home loan. Mortgage insurance is required when home buyers put less than 20% down on a home purchase, and the high cost of PMI makes it a good idea to quickly figure out how to get rid of mortgage insurance.
Normally, mortgage insurance is paid monthly, with the mortgage payments, through an escrow account. Many home buyers wonder nearly immediately after closing how to get rid of mortgage insurance.
How to Avoid PMI
Because mortgage insurance can add hundreds of dollars per month to a mortgage payment, it is important to know how to avoid PMI altogether, so that how to get rid of mortgage insurance never becomes an issue in the first place.
Home buyers can avoid PMI if they put enough money in the down payment to bring the home’s Loan to Value (LTV) ratio under 80% when the home is initially purchased. This means that the amount that the mortgagee will owe on the home loan is less than 80% of the home’s appraised value at closing. Another way to say this is the home buyer will make more than a 20% down payment on the home when they buy it.
Some government-backed home loans, such as home loans granted through the Federal Housing Administration (FHA), now, as of 2017, require mortgage insurance for the life of the loan. If this is the case, a home buyer may wish to wait until they have more money saved for a down payment.
How to Get Rid of Mortgage Insurance
If a homeowner has a home loan through FHA that closed prior to May 7, 2013, a USDA home loan, an FHA home loan, a private home loan, or, in some cases, a state government backed home loan, the homeowner can get rid of private mortgage insurance. Reappraisal, renovation, refinance, and loan modification all offer a convenient path to get rid of mortgage insurance. The best way to get rid of mortgage insurance though, is to utilize a combination of several of these techniques.
Reappraisal to Remove PMI
PMI is based primarily on appraisal value, so having a home reappraised is an easy way to get rid of PMI. The relatively small amount of money homeowners must spend to have their home reappraised is usually worth spending.
If closing was at least two years ago, chances are, in today’s market, the home’s value has increased. This increased value will be reflected in the homeowner’s new appraisal. If the home value has increased enough, the LTV ratio will become low enough that the homeowner can remove PMI, getting rid of mortgage insurance on that home for good.
Remove PMI After Renovation
Another great idea to get rid of mortgage insurance is to remove PMI after renovation. Once a home has been renovated, both the amount of equity and the appraised value of the home have increased. Not only can renovation lead to getting rid of mortgage insurance, but the homeowner essentially repays themselves for the renovations through thousands of dollars in PMI savings when they remove the PMI after renovation.
For example, if a homeowner uses $25,000 of their own money to renovate their home, and the home reappraises for 25% more than it originally did at closing, chances are very good that the homeowner can get rid of mortgage insurance. Sometimes, even the cost of taking out a home renovation loan is well worth the total savings enjoyed when a homeowner can remove PMI after renovation.
Refinancing to Remove PMI
If a homeowner is willing to pay for reappraisal, has extra cash on hand to pay down points, or has an improved credit score, then refinancing is an excellent way to get rid of mortgage insurance. During refinancing, although it may cost some a small amount of equity in closing costs, not only are monthly payments lowered, re-paying the homeowner for their refinancing closing costs, but a reappraisal usually comes as part of the refinancing package. Refinancing will allow significant enough savings to employ one or more additional techniques to remove PMI.
Removing PMI Through Loan Modification
Like refinancing, a loan modification can be a wonderful way to remove PMI, although loan modifications are normally offered only when the mortgagee is experiencing financial hardship. Some lenders will modify a loan regardless of hardship though.
Government-backed home loan agencies, such as state housing agencies, FHA, United States Department of Agriculture (USDA), or the Veterans Administration (VA), offer a special type of HUD grant as part of a loan modification which have the added effect of lowering your LTV ratio. This grant can be up to $50,000 and only needs to be repaid once the home is sold to another buyer. In determining the LTV ratio after a loan modification, the amount of the grant is not considered when determining how much the homeowner owes on the loan. Private lenders also often offer their own specific loan modification programs.
Once a homeowner realizes just how much they can save if they get rid of mortgage insurance and how easy it is to remove PMI, there is no reason to continue this expensive outlay of precious, limited funds. Whether a homeowner chooses to remove PMI after renovation, reappraisal, refinance, or loan modification, the savings will be significant. The returns on any money spent getting rid of mortgage insurance will be immediately felt and well worth the investment!
Looking to get a new mortgage or maybe refinance your home? Call us today, we are the experts in home mortgages.