For most homeowners, Private Mortgage Insurance (PMI) is an added cost that can make their monthly mortgage payment higher than it needs to be. PMI is typically required when a home buyer puts down less than 20% of the purchase price of the home. It's designed to protect the lender in case the borrower defaults on their loan. However, once a homeowner builds up enough equity in their home, they can have their PMI payment removed.
Many homeowners assume that they have to wait for their lender to automatically terminate the PMI payment when the mortgage balance reaches 78% of the original purchase price and they haven't missed any payments. This is based on the 30-year amortization schedule and for most homeowners, can take around 5 to 10 years
to build up their equity levels if they are just using the amortization schedule. But, as mentioned earlier, the good news is that in addition to paying down your loan each month and building equity that way, your home is also appreciating in value each year.
Since the pandemic hit in 2020, we've seen home values skyrocket. That means, there's a good chance you're already sitting on 20% equity and you didn't even know it. So how do you remove that PMI payment early rather than waiting on the amortization schedule to automatically remove?
First, you'll want to contact your loan servicer and ask about the process of removing PMI. They will likely require an appraisal which will cost you a few hundred dollars, and the appraiser will evaluate your home. Make sure to share if you've made any improvements to the home or replaced any systems. This will help to bring the value up. If the appraisal determines that you have 20% equity in your home, the loan servicer will drop the monthly PMI payment, saving you hundreds of dollars each year.
It's important to note that this process is for conventional loans. FHA loans do not allow you to remove PMI. You would need to refinance out of an FHA loan to remove PMI.
Let's also discuss how much PMI can cost. The average cost of private mortgage insurance for a conventional home loan ranges from .58% to 1.86% of the original loan amount per year. So, if you purchased a $300,000 home, you could be paying somewhere between $1,500-$3,000 per year in mortgage insurance. This cost is broken into monthly installments, so that looks like $125-$250 per month.
Removing PMI early is a great way to save money on your monthly mortgage payment. By taking advantage of the increasing value of your home, you could save hundreds of dollars each year. Just be sure to contact your loan servicer and inquire about the process for removing PMI.
Comments