If you bought a house with a down payment of less than 20 percent, your lender required you to buy mortgage insurance. The same goes if you refinanced with less than 20 percent equity.
Private mortgage insurance, called PMI for short, is expensive. But you can remove it after you have met some conditions.
You should know, however, that although you can cancel private mortgage insurance, you cannot cancel recent Federal Housing Administration insurance.
Canceling PMI sooner
Here are steps you can take to cancel mortgage insurance sooner or strengthen your negotiating position:
– Refinance: If your home value has increased enough, the new lender won’t require mortgage insurance.
– Get a new appraisal: Some lenders will consider a new appraisal instead of the original sales price or appraised value when deciding whether you meet the 20 percent equity threshold. An appraisal generally costs $300 to $500.
– Prepay on your loan: Even $50 a month can mean a dramatic drop in your loan balance over time.
– Remodel: Add a room or a pool to increase your home’s market value. Then ask the lender to recalculate your loan-to-value ratio using the new value figure.
Refinancing to get out of PMI
When mortgage rates are near record lows, as they are now, refinancing can allow you not only to get rid of PMI but can also reduce your monthly interest payments. It’s a double-whammy of savings.
The refinancing tactic works if your home has gained substantial value since the last time you got a mortgage. Let’s say you bought your house three years ago for $100,000, and you borrowed $90,000. That means you have a loan-to-value ratio of 90 percent, and you pay for PMI.
Three years later, you’ve made all your payments and you have chipped away at the loan balance. Now you owe $85,000. And your home’s value has gone up – now it can be appraised at $112,000. Its value has grown 4 percent a year.
At this point, you owe $85,000 on a $112,000 house. This means you owe 76 percent of the home’s value – well under the 80 percent loan to value that triggers the need for mortgage insurance. Under these circumstances, you can refinance into a new loan without having to pay for PMI.
Many loans have what’s called a seasoning requirement that requires you to wait at least two years before you can refinance to get rid of PMI. So if your loan is less than 2 years old, you can ask for a PMI-canceling refi, but you’re not guaranteed to get approval.
What mortgage insurance is for
Mortgage insurance reimburses the lender if you default on your home loan. You, the borrower, pay the premiums. When sold by a company, it’s known as private mortgage insurance, or PMI. The Federal Housing Administration, a government agency, sells mortgage insurance, too.
Know your rights
By law, your lender must tell you at closing how many years and months it will take you to pay down your loan sufficiently to cancel mortgage insurance. Mortgage servicers must give borrowers an annual statement that shows whom to call for information about canceling mortgage insurance.
Other requirements to cancel PMI
According to the Consumer Financial Protection Bureau, you have to meet certain requirements to remove PMI:
– You must request PMI cancellation in writing.
– You have to be current on your payments and have a good payment history.
– You might have to prove that you don’t have any other liens on the home (for example, a home equity loan or home equity line of credit).
– You might have to get an appraisal to demonstrate that your loan balance isn’t more than 80 percent of the home’s current value.
Lenders can impose stricter rules for high-risk borrowers. You may fall into this high-risk category if you have missed mortgage payments, so make sure your payments are up to date before asking your lender to drop mortgage insurance. Lenders may require a higher equity percentage if the property has been converted to rental use.
By Holden Lewis, Bankrate.com (TNS). Visit Bankrate online at bankrate.com.