How to Get Rid of PMI (Private Mortgage Insurance)
Private Mortgage Insurance (PMI) is something most mortgage loan programs require unless the borrower has more than 20% equity of in the property. PMI insures the lender against default by the borrower and it generally costs 1/2 – 1% of the loan amount per year. This is incorporated into the monthly mortgage payments. Essentially, the bank is charging the borrower extra fees to insure themselves against extra risk.
PMI is often tax deductible if the borrower’s adjusted gross income is less than $109,000. Even so, why pay it if you can avoid it. There are ways to end PMI. You are not stuck with it for the life of your loan. So, how do you get rid of PMI? Here are 3 possible ways to end PMI:
1) It will automatically cancel once your loan balance is below 78% of the original purchase price.
2) It will automatically cancel at the midpoint of your loan.
3) You can cancel PMI sooner if your loan to value ratio (loan amount divided by home value) is down to 80% or lower. In other words, if you can show that you have 20% equity in the home, you can request your lender cancel the PMI. If you think you are at this point, check with your lender on their policies and procedures for stopping PMI. The lender will typically hire an appraiser, at your cost, to prove the value of your property. If the appraisal shows the appropriate value, the lender will cancel your PMI.
Option 3 is definitely something you’ll want to keep an eye on if you’re buying in the current market. Many people are buying fixer uppers or foreclosures in this market. Also, many buyers are getting in at the bottom of the market and starting to see some positive appreciation numbers again. If you bought with 10% down, and did a few repairs or updates, you could have 20% equity in a few short years. If you think your close to 20% equity now, and you’re in the Madison area, feel free to ask us for a free market analysis prior to spending your money on an appraisal.
In order for any of these options to work, you must be current on your payments. The lender will not cancel your PMI if you’ve had late payments or other issues that put your loan in a high risk category.
Ask your lender what their policy is for terminating PMI, and make it a goal. Stop throwing that money away and put it to good use!