What is Private Mortgage Insurance?
Homeowners are required to purchase Private Mortgage Insurance or PMI at the time of property purchase or refinance if the down payment or personal equity on a residence is less than 20% of the purchase price or market value. Private Mortgage Insurance protects lenders in the event the homeowner defaults on the mortgage. Therefore, it serves NO financial benefits to the Homeowner.
Currently, a homeowner must initiate the process in order to eliminate PMI when 20% equity is achieved. This equity accumulation can be gained through mortgage principle payments and appreciation of the property.
Many homeowners are unaware when they become eligible to terminate Private Mortgage Insurance as well as the necessary steps to cancel the insurance. As a result, many American homeowners are paying for PMI when it is no longer required.
How to Get Rid of Private Mortgage Insurance (PMI) on an Existing Loan and Save Money
Private mortgage insurance, or PMI, is an additional monthly fee required by most lenders when your down payment on a home is less than 20 percent. Here are some ways to get rid of PMI on your existing home loan.
Step 1: Read through the loan documents. A loan with PMI (also known as mortgage insurance, or MI) should include a document describing the mortgage insurance and providing the rules for canceling it.
Step 2: Maintain a good repayment history on your loan.
Step 3: Request the cancellation of PMI in writing. Once the loan has been paid down to 80 percent of the original loan amount or when the equity in your home increases 20 percent you may request a cancelation of your PMI. Increase in equity will be determined by a new appraisal. (If you've paid the original loan down to 80 percent, you can request a cancellation of PMI without an appraisal.).
Tips:
New laws make it easier for the borrower to remove PMI. An expected change is the automatic removal of PMI by a lender once the loan balance reaches 78 percent of its original value or is at the midpoint of the loan term. You can also provide an appraisal to your lender (at your expense) to prove the increase in your home's value. By the way, removing PMI can save a borrower $500 to $1,500 per year on average.
Warnings:
Unlike mortgage interest, PMI is not tax deductible. Also, there may be an initial period during the first one to three years of a loan term in which PMI cannot be canceled, even if you have accrued 20 percent equity or the value of the home has appreciated. Therefore, it is important that you read your loan documents carefully so you know when to have PMI removed.
If your neighborhood is experiencing a downturn in values, you will have more difficulty removing the PMI. Call a good professional Realtor for help and advise when attempting the removal of PMI. Use a Realtor with a CRS or GRI Designation or a Realtor who is a Broker and knows what to do .
