Along with your monthly mortgage payments, you'll also have private mortgage insurance, an additional cost that can create financial stress. It's part of the reason why most homeowners default on their payments.
However, there are a few ways to get out of it. As you continue to build up equity for your home, you can get rid of those extra mortgage payments by reaching certain home equity milestones or through refinance.
But we'll discuss everything you need to know in today's article. If you're tired of those extra monthly costs, continue reading to learn more.
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Private mortgage insurance covers all of the lender's bases if you default on your mortgage. Homeowners who opt for the conventional way of getting a mortgage by supplying a 20% down payment usually have to get private mortgage insurance.
It's an extra annual cost that will vary depending on your credit score and your down payment. Then every following year, it's recalculated depending on the size of your loan. However, PMI doesn't apply to all loans.
For example, government-backed FHA loans or VA loans, which require a small or no down payment, have their own rules. So your loan type will determine if PMI is required or not.
To understand the real cost, it helps to look at how is mortgage insurance calculated. PMI typically runs between 0.5% and 1.5% of your original loan amount per year. On a $400,000 mortgage, that's potentially $2,000 to $6,000 annually just to protect your lender, not yourself. Knowing that number upfront changes how you plan your finances and how urgently you work to remove PMI from your monthly payment.
What Exactly Is An Underwater Mortgage?
As we stated above, when you take out a conventional mortgage that the federal government does not insure, PMI payments will be included in your monthly mortgage payment. You'll have to pay this premium until you've built up at least 22% home equity.
For those taking out an FHA loan, you'll need to pay a different type of insurance called a Mortgage Insurance Premium. If you put down less than 10% on your loan, you won't be able to cancel your MIP. But if you paid more than 10%, your lender will automatically cancel the premium after 11 years.
The rules around private mortgage insurance cancellation depend heavily on which type of loan you have. Conventional loans follow the Homeowners Protection Act, while FHA loans work under a completely separate framework. Before you assume your PMI will just disappear, it's worth confirming with your lender exactly which rules apply to your situation and what the cancellation timeline looks like for your specific loan balance and payment history.
How is Mortgage Insurance Calculated
While PMI payments can feel like they have a tight grip on your finances, you should be aware of certain protections you're entitled to while paying the premium. The federal law, which is called the PMI Cancellation Act, protects you from excessive PMI charges.
After you've built up the required amount of home equity, you have the right to get rid of your PMI. Lenders will have different requirements before you're allowed to ditch your PMI. However, once you meet the targets, they have to let you end the payments.
Before signing up for a mortgage with PMI, ask for clarification of rules and a schedule of the payments. It'll help you see how far you have to go before ending your PMI payment.
A lot of homeowners don't realize they can ask for early cancellation before the automatic date kicks in. If you've reached the required equity threshold and have a solid payment history, you have legal grounds to make that request.
The key question is when can I remove private mortgage insurance from your specific loan, and the answer depends on your loan type, your balance, and whether your home has held its value. Don't wait for automatic termination if you can make the request sooner.
Mortgage interest rates can be a deterrent when looking to purchase a home. Mares Mortgage outlines everything you need to know so you can buy with confidence!
14 Mortgage Questions You Should Ask Your Lender
At Mares Mortgage, we understand you're ready to ditch the extra monthly payments and start saving money. However, you need to make sure you go about doing so the right way.
By hastily trying to get rid of your PMI, you could potentially mess up your finances. So here are four ways to help you get rid of those extra mortgage payments.
Not every method suits every homeowner. The right path depends on your current loan balance, how long you've held the mortgage, and whether your home's value has increased. Running the numbers before you act is the smartest move.
If you're unsure where to start, a mortgage professional can help you assess your options and figure out the fastest route to cancel private mortgage insurance without hurting your financial position. If you want a clear breakdown before deciding, a step-by-step guide on how to get rid of mortgage insurance can walk you through each approach and help you identify which one fits your situation.
If you cannot convince your lender to cancel your PMI payments, you could opt for mortgage refinancing. It's an option usually considered by buyers looking to lower their monthly payments by extending their loan term.
However, it's also valuable for getting rid of your private mortgage insurance. By reworking your mortgage and getting a new one, your overall balance changes. If it falls under 80%, your lender will have to cancel your PMI.
But before refinancing, calculate the closing costs of the new mortgage compared with potential savings from not having to pay PMI. If the costs to refinance are higher than what you'll save, then you shouldn't refinance.
There are also other solid reasons to refinance your home beyond just removing PMI, like locking in a lower interest rate or switching from an adjustable to a fixed-rate mortgage. If the timing lines up for more than one of these goals, refinancing can deliver real savings fast.
If you don't want to wait for the automatic cancellation of your PMI, you can request that your lender cancels your PMI once your loan balance equates to 80% of your home's original selling price. You can find information about your payment scheduling on your PMI disclosure form or by requesting it from your provider.
If you want to get to the 80% requirement, you can make extra payments if you have the cash to spare. By prepaying the principal on your loan and reducing the balance, you can build equity faster.
The connection between home equity and PMI removal is direct: the faster you build equity, the sooner you can request cancellation. One thing many homeowners miss is that lenders won't remove PMI automatically at 80%. You have to submit a written request. If that date passes and you're still being charged, you have the right to dispute it. Check your mortgage statement regularly and mark the date on your calendar so you're ready to act the moment you qualify.
The real estate market could benefit your home in a significant way by raising its value by 20% ahead of the original schedule. So you may want to get your house appraised to see its current value.
If your loan balance is no more than 80% after the new appraisal and you've owned the home for at least five years, you can ask to have your PMI canceled. However, if you've owned the house for two years, your remaining mortgage balance cannot be greater than 75% of the home's original value.
A home appraisal for PMI removal typically costs between $300 and $500, which is almost always worth it if your home has appreciated significantly. In markets where home values have risen sharply, some homeowners hit the 20% equity threshold years ahead of schedule without making a single extra payment. It's worth requesting an appraisal if your neighborhood has seen growth, but confirm your lender's requirements first since not all lenders accept third-party appraisals for this purpose.
As we've mentioned, even if you don't request PMI cancellation, an automatic date gets issued for when your balance is supposed to get to 80%. To have your PMI ended then, you need to be current on your payments.
You can also stop your PMI payment at the midpoint of your loan's length term. So if you had a fixed-term loan of 20 years, you could cancel the premium once ten years have passed. But you need to be current on your payments.
Automatic cancellation is a legal protection built into the Homeowners Protection Act, but it comes with specific conditions that still apply to you. You need to be current on all payments, and your lender is required to act without you having to chase them.
If the termination date passes and PMI is still appearing on your statement, contact your servicer in writing immediately. It's also smart to review 5 hidden mortgage costs that continue to affect your monthly budget even after PMI is gone, so you're not caught off guard by what's left.
PMI exists to protect your lender, not you. Once you no longer need it, there's no reason to keep paying. Connect with Mares Mortgage to explore your PMI removal options and find out exactly which path makes the most financial sense for where you are right now.
Whether you're buying a new home or refinancing on a new property, let Mares Mortgage help you with all of your mortgage needs. We'll get you a loan approval letter in minutes to move your application along. Also, we'll talk you through the different loan options to make sure you're paying the most reasonable price.
Are you ready to land your dream home? Contact Mares Mortgage today to get started on your loan application!
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