Before you look for a mortgage lender that will allow you to buy your next home without a substantial down payment, there are a few initials that you should know about: PMI. Short for private mortgage insurance, this is additional mortgage insurance that is attached to the purchase of a traditional home loan with less than 20% discount. Any time you pay less than 20% down payment on a home purchase with a traditional loan, you will likely have to pay for that insurance.
In this post, we’ll talk about what PMI is, who must have it, and how to get rid of mortgage insurance.
What is private mortgage insurance?
Private mortgage insurance is a form of insurance that protects your lender when you stop paying your mortgage. The problem is, for borrowers, it could potentially add $ 100 or more to each mortgage payment. It only protects the lender in case you default; it doesn’t cover anything on your side. But you will pay for it. If you default on your mortgage, PMI completely completes your lender but does nothing for you.
Typical mortgage insurance will cost you between 0.41% and 1.61%, the amount depending on a number of factors. In general, the average value for the PMI is around 1%. With a median of 1% mortgage insurance, a $ 300,000 mortgage will cost you an additional $ 3,000 per year (or $ 250 per month) in the PMI.
How do people get PMI?
Lenders assume that the less money you have invested in a home, the easier it will be for you to get off the mortgage without paying and put it on the bill. If you are planning on buying a home and cutting it down less than 20%, expect to be viewed as risky by lenders. You have to pay PMI for your mortgage loan.
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Your lender will make all arrangements for the additional mortgage insurance. In most cases, you will have to pay PMI on a monthly basis and it will be added to your mortgage bill. In some cases, you may have to pay the premium in full upfront, although it is less likely to do so. If you need to pay for mortgage insurance, it will be reflected in your loan estimate upon completion.
How to Remove Private Mortgage Insurance
Often times, considering how many thousands you can pay in PMI in the long run, saving for a larger down payment makes more tax sense. You should consider this before getting a mortgage with PMI.
If you’re already paying for mortgage insurance, light is at the end of the tunnel. Once you’ve built at least 20% equity in your home through mortgage payments or real estate appreciation (or both), you can ask the lender to remove personal mortgage insurance. However, don’t assume that a bank or mortgage company will stop charging you PMI once you hit the magic number of 20%. You are not legally required to do so until you reach 22% equity.
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You may be able to get rid of PMI by starting the process yourself at 20%. Some lenders will remove it at this point. To get rid of the PMI with 20% equity, you need to write a letter to your lender asking for the PMI to be removed. The letter should explain why you want to cancel private mortgage insurance.
Some valid reasons you can give are:
- You have paid in enough and have now built up between 20% and 22% equity in your home.
- You have noticed that real estate values in your neighborhood have skyrocketed and you suddenly have more equity in your home. Say it cost $ 300,000 to buy your home. You still owe $ 280,000, but the similar house next door just sold for $ 350,000. You can have your home valued and if it gets anywhere near $ 350,000 you now have enough equity to ask the lender to stop mortgage insurance.
- You recently remodeled the home, updated your kitchen and bathroom, and added significant value to your property. Contact your lender for a new appraisal to show the greater value of your home.
Should You Get Rid of Your PMI?
As a rule, everything has two sides – the advantages and disadvantages. With private mortgage insurance, there is really no good reason to continue paying when you no longer need it. PMI doesn’t give you any protection or benefit – other than a traditional loan, you can buy a home for less than 20% less.
You should definitely try to get rid of PMI as soon as possible. There are better ways to spend the money, such as an emergency savings fund. Or to make additional mortgage payments. Or to fund your retirement account.
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To get rid of mortgage insurance, you need to have a handle on your equity. Calculate the number you need to meet as the loan amount before you can apply for the PMI to be discontinued. You can use a loan amortization calculator to estimate the date that you will hit the target amount that you want to mark. You can also sign up for neighborhood updates on recent sales, or check out the latest sales data for your neighborhood every now and then to see how the value of your home is doing.
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