Lenders require private mortgage insurance (PMI) on conventional loan programs to protect themselves against potential loss if you stop making payments. You may be thinking that there must be a way to avoid being responsible for paying insurance premiums on something, hopefully, your lender will never need.
The simplest way to avoid paying PMI is to make a down payment that is large enough to cancel out the need for insurance in the first place.
Easier said than done, right? So, what else can you do to avoid paying for private mortgage insurance?
Specifically, find one that does not require private mortgage insurance as a condition of getting the low or no down payment. Look for loans that are guaranteed or backed by a government agency such as the VA, USDA or FHA. In lieu of requiring private mortgage insurance, there may be guarantee fees, funding fees, or other mortgage insurance required to protect the agency backing the loan.
It’s important that you keep a close eye on your loan’s principal balance because it will be an indicator of when you might be able to request that your lender remove the private mortgage insurance from your loan.
Once your balance drops below 80% of your home’s value or below 80% of your home’s current market value, you can submit a request in writing asking if you can have your PMI cancelled.
Depending on the type of loan you have and what conditions are in your private mortgage insurance policy, you may be required to make a certain number of payments before PMI can be cancelled. You may also be required to have a payment history free of late payments for a specific number of months. For example, no 30 days or more late payments in a 12-month period and no 60 days or more late payments in a 24 month period.
Every year, you’ll receive a notice that shows where you are with your loan balance and potential for PMI cancellation. Lenders have to monitor this closely themselves because they’re required to terminate PMI per the Homeowners Protection Act of 1998 once your balance reaches 78% of the purchase price or appraised value at the time of purchase, whichever is lesser. As soon as the lender confirms you’re eligible to have your PMI cancelled, they’ll send you a letter. It may also come from a subservicers on their behalf.
If you’re not close to the 80% loan-to-value target and you’ve made improvements on the home, you may want to get an appraisal. If your remaining loan balance multiplied by the factor 1.25 is less than the appraised value, you can request consideration for PMI cancellation.
In exchange for a small increase in your mortgage interest rate, lenders may be able to take care of the private mortgage insurance. Unlike regular private mortgage insurance that you pay for, lender-paid private mortgage insurance cannot be cancelled per your request. Before selecting this option, you’ll want to do some math to determine what’s best for you and your budget long-term.
It may be appealing to not have a monthly PMI premium; however, the increased interest rate may result in you paying more in interest over the life of your loan.
On the flip side, interest is a tax write-off, whereas MI isn’t always a write-off if you exceed a certain income bracket.
Let’s look at a hypothetical example:
John and Jane both get a $225,000, 30-year, fixed-rate mortgage. Both are required to have mortgage insurance. John opts for the traditional monthly-paid private mortgage insurance that’s included in his mortgage payment. Jane negotiates a higher interest rate in order to have her lender pay the private mortgage insurance as a single premium to the private mortgage insurance company.
As seen in the table below, John has a lower principal and interest payment than Jane. However, he pays $84 a month in PMI, which raises his overall mortgage payment.
Once John’s loan meets the requirements to drop PMI, his payment is reduced by $84 per month. Jane’s loan is not eligible for PMI removal. After the loan reaches maturity with all 360 payments being made, John pays $417,509 for his $225,000 loan. Because of the higher interest rate, Jane pays a bit more for the same loan.
If your home value has increased but you don’t meet the requirements to cancel the PMI, you may be able to refinance into a new loan that doesn’t require PMI.
Talk to one of Atlantic Bay’s loan officers about the cost-savings, because there will be fees to do the refinance and you’ll want to make sure it’s worth it in the long run.
If paying for private mortgage insurance is making you hesitant to get a mortgage loan, please talk to a mortgage banker about ways to save for the down payment, down payment assistance programs, loans that don’t require PMI and how long you may need to pay PMI before you can cancel.