Hi there! There are a few ways that you can get rid of your PMI sooner. PMI, or Private Mortgage Insurance, is a way that lenders (your bank) protect themselves in case you default on your payments and usually occurs when the down payment was less than 20%. This insurance can add hundreds of dollars a month to your bills!
The first step in getting rid of it is to find out the "automatic termination" date. Your lender is required by law to provide this to you. This is the date when your equity (what you've paid) is supposed to reach 22% of the loan amount (in other words, this is when your loan balance reaches 78% of what you took out). If you are current with your payments, it'll cancel automatically on this date. The date is important because even if you hit that 22% equity before that date, they won't cancel it themselves until then.
To get rid of your PMI before this date, you'll want to go the route of "early cancellation", also called "borrower initiated". For this, the lender goes by the original appraised value and looks to see if your equity in the property has reached 20% of that price. In layman's terms, if you've "paid off" 20% of the original house value, you're good to go, and they're looking for a "loan vs. value" ratio. Value is key, here. Adding value to your home will increase that ratio in your favor, allowing you to cancel sooner. Things like renovations or additions can add to the appraisal value. Granted, this isn't the cheapest way to go about this, but if you are already planning on remodeling (or already have) it's good to know that it'll qualify you sooner. Conversely, if your home loses value the ratio will tilt the opposite way.
Another way to cancel early is to make extra payments if your finances allow. Again, it's all about hitting the magic numbers as soon as possible. Even if it's just a little extra each month or an extra mortgage payment or two each year, it'll add up over time and have you free of your PMI that much sooner. If you go either of these routes, be aware you will need to request the PMI to cancel once you reach the target - they won't do it automatically until the date you're supposed to hit 22%.
If you are set on getting rid of PMI soon and increasing appraisal value and/or extra payments isn't an option, sometimes refinancing can help. Refinancing your mortgage is a big decision and requires you to compare rates of lenders in your area. It can get rid of PMI but also carries it's own array of pros and cons, so look into it and get quotes before deciding to go ahead with it.
Kerry Wilson, Member
Getting rid of private mortgage insurance takes time, effort, and maybe a bit of luck. Gaining 20% home equity is the most reliable method. You are legally entitled to having it ended without asking once your mortgage loan reaches 78% of its value. This method, obviously, will only be available after quite some time has passed. It should be noted that this method is not something you can simply rush towards; though paying off more than your minimum mortgage payment is always beneficial if you can manage it, it won't do a whole lot to speed up the equity process. The magic 78% number is usually predetermined by the initial amortization schedule, and automatic termination of PMI will usually not happen until that date has passed, regardless of the progress you've made towards paying off your mortgage. It should also be noted that this process can be delayed still further if you are not up to date on your mortgage payments, when all other prerequisites have been met.
Another, and somewhat less reliable method, is to attempt to pay down your mortgage to below 80% of its original value and ask the lender to cancel your PMI requirement. As noted before, paying down your mortgage fast is not (by itself) a magic solution to the problem because in addition to the minimum time limit, the current value of your home is an important factor for lenders when determining whether to grant the request. For example, a home which devalues over the course of the mortgage may still be considered risky.
Your best bet? Refinance! If you've already passed the 20% mark in paying down your mortgage, and you refinance that mortgage, you are essentially starting the process of appraisal all over again, but this time you have the advantage (if you can demonstrate clearly that you possess at least 20% home equity). Not only does refinancing give you better leverage to remove your PMI, but you'll also likely benefit additionally from a reduced interest rate.
Ross Garner, WalletHub Community Manager
There is a clear method of removing PMI: you need to get at least 20% equity in your home. Most lending institutions require a borrower to maintain a mortgage insurance policy until they own at least 20% of their home; once you reach that mark you can request the policy be cancelled. By law banks are required to end the policy automatically once you reach 22% equity in your home.
There are a few other ways your equity could potentially rise enough that you will no longer have to pay for PMI. The most obvious would be if your home value has appreciated enough that you have 20% equity. If you think you are getting close, it could be worth your time to check and see if property values have risen enough in your area. If you have made home improvements since you purchased it, the added value might also push up your equity. Lenders will not accept estimates unfortunately, you will have to get your home appraised at your expense to establish it’s market value.
Another method of getting rid of PMI is to use a home equity loan or line of credit to pay off enough of your mortgage to get to 20% equity. Many borrowers keep two mortgages on their home, and it is not uncommon anymore to take out a second mortgage of some sort to pay down a portion of your original loan.
Last you could borrow the money from family or friends to get yourself to 20% equity. It’s not unheard of for parents or family members to simply give someone a gift for such purposes, though you would have to be lucky to get it free and clear.
After you reach 20% equity, you should be proactive about cancelling the policy. Make a request in person or send your bank a certified letter asking for the policy to be removed. Even after reaching 22% some lenders might not immediately follow their requirement to cancel PMI, and it is your responsibility to ensure it is cancelled in a timely manner. Just make sure that you are close to the 20% equity threshold before you opt for a new appraisal, since you will be the one paying for it.
Did we answer your question?