When you bought your home, you may have been required to take out Private Mortgage Insurance (PMI) if you didn’t make a large down payment. PMI is normally required when you borrow more than 80% of the property’s value, even if you have perfect credit. If you buy a house with less than a 20% down payment, you can expect your mortgage payment to include a monthly Private Mortgage Insurance premium.
The bad news is, this insurance does nothing for the buyer of the home; instead, it is designed to protect the mortgage lender in the event you don’t pay for your loan. The good news is, PMI can be removed once you’ve paid your loan down to a certain balance, so you aren’t stuck paying the PMI premiums forever.
The following tips explain the costs of PMI and how you can more quickly eliminate that expense.
The Cost of Private Mortgage Insurance
Your PMI premium will vary depending on the type of mortgage you have, and the length of time you took your loan out for. Private Mortgage Insurance normally ranges between ½ to 1% of the total loan amount, per year. On a $200,000 house where you put 10% down, your PMI premium will probably cost between $75 and $150 each month.
If you obtained your mortgage after 2006, your PMI premiums are tax-deductible expenses if your adjusted gross income is less than $109,000 for married couples, or $54,500 for individuals. When you receive Form 1098 from your mortgage lender at tax time, you’ll see how much you paid in Private Mortgage Insurance premiums.
How to Stop Paying Private Mortgage Insurance
In most situations, lenders must cancel PMI when you pay your mortgage to 78% of the home’s value and you are current on your monthly mortgage payments, according to The Homeowner’s Protection Act of 1998. Before this act was created, homeowners who didn’t know they could cancel PMI would continue to pay it to lenders who didn’t remove it for them.
You can also be proactive, and request a cancellation of your PMI premiums once your mortgage reaches 80% loan-to-value ratio; instead of waiting until it reaches the required 78% for automatic cancellation under the Homeowner’s Protection Act of 1998. You’ll need to be current on mortgage payments, not have a lien on the property or have a high-risk loan to be approved.
Additionally, if you’ve been paying your mortgage through the midpoint of your loan (15 years on a 30 year mortgage term, for example), PMI must be canceled even if you don’t meet the balance requirement of 78% of the home’s value. This is because in some situations, the property value is decreasing as fast (or faster) as you’re paying off your mortgage.
If the value of your home has increased above your original purchase price, your loan-to-value ratio could decrease and help you meet the 80% or 78% rules that allow you to cancel your PMI. Keep an eye on the home’s value so you know when you have the opportunity to cancel PMI.
Tip: Haven’t bought your house yet? An 80-10-10 mortgage is designed to avoid PMI from the outset. There are pros and cons to these mortgages, so be sure to read up on them before using this option.
How to Cancel PMI Faster
If the idea of paying an extra $75 to $150 a month in PMI premiums makes you sick, here’s what you can do to reach the 80% loan-to-value ratio quicker:
- Send extra mortgage payments each month to pay your loan down faster (making biweekly mortgage payments is a great way to so this).
- Complete home improvement projects which increase the value of your home and then have your home appraised to show it’s new value.
- Pay your mortgage on time, every time so you can cancel at 80% loan-to-value ratio rather than waiting to reach 78%.
- Don’t take out home equity loans or lines of credit as they reduce your property’s equity and cause you to pay PMI longer.
Remember, Private Mortgage Insurance doesn’t benefit you – it benefits the lender. So you want to get rid of it as quickly as possible. Eliminating PMI is a great way to free up some additional cash flow each month to help you reach other financial goals.