What’s PMI and Why Does It Matter?
So, you bought a home with less than a 20% down payment? Congrats on becoming a homeowner! But you’ve probably been introduced to PMI – Private Mortgage Insurance. While it’s a useful tool for lenders to reduce risk, as a homeowner, it can feel like a monthly thorn in your side. Especially when those payments add up over time.
When Does PMI Bid Adieu?
Greg McBride, Bankrate’s chief financial analyst, mentions, “There seems to be a philosophical aversion to PMI on the part of many buyers that is misplaced.” However, the good news is PMI isn’t a lifelong commitment. The Homeowners Protection Act of 1998 stipulates that lenders have to kick PMI to the curb once a borrower’s loan-to-value ratio hits 78%. So, on a $300,000 home, this would be when your principal outstanding is about $234,000.
Now, Let’s Unpack Ways to Shake Off PMI:
1. Sit Tight for Automatic PMI Termination
Sometimes, patience pays. A federal housing regulation, unofficially called the “PMI Cancellation Act,” mandates that your lender has to cut off PMI when your loan balance is at 78% of your home’s buying price. Alternatively, they also have to stop PMI charges at your loan’s halfway mark. For a 30-year mortgage, that’s 15 years in.
2. Make That 80% Equity Request
Don’t feel like waiting? You can get ahead by asking your lender to remove PMI once you’ve accrued 20% equity in your home. But remember, you have to actively seek this out. It won’t happen automatically.
3. Boost Your Mortgage Payments
If you can, consider paying a bit more on your mortgage every month. This not only reduces your loan balance but also the interest. A little extra can go a long way.
4. Refinancing Could Be The Answer
While refinancing isn’t the best choice for everyone, it can be a smart move if home values have surged since you first took out your mortgage. This means you could potentially refinance to a new loan that’s below 80% of your home’s current value, getting rid of PMI.
Check refinance rates and fees on WiseMoneyLife.com.
5. Reassess Your Home’s Worth
Your home’s value might have soared without you realizing. Especially in bustling real estate markets. If you suspect this, getting a new appraisal might be beneficial. You might just have enough equity built up to say goodbye to PMI.
6. Invest in Your Home
While you shouldn’t remodel your home solely to dodge PMI, any value-added improvements can help. If you’ve upgraded parts of your home recently, this could push up its market value. This, in turn, might tip your equity over that 20% threshold.
You can use cash or home equity to help fund your next home renovation.
Tread with Caution
Though eliminating PMI is financially freeing, don’t compromise your overall finances. Retaining some liquidity is wise. Before plunging your savings to attain that 20% equity, it’s crucial to weigh all options. As McBride points out, it might not be prudent to empty out funds just to bypass PMI, especially if it strains your financial elasticity in the future.
Your Rights Regarding PMI
Knowledge is power. If you’re paying PMI, you should be well-versed in your rights under the Homeowners Protection Act. This ensures you don’t get overcharged and gives you the ability to challenge any PMI-related discrepancies.
Before sealing the deal on a PMI-included mortgage, make sure you understand all the conditions. Should any issues arise later, you can always reach out to the Consumer Financial Protection Bureau.
PMI might feel like a necessary evil, especially when those monthly charges keep rolling in. But with some strategic planning and the right moves, you can shed PMI and free up some of your hard-earned cash.