If a home is purchased with a conventional loan with a deposit of less than 20%, the lender requires the purchaser to pay PMI, or private mortgage insurance.
Private mortgage insurance is quite literally an insurance policy for the lender. The insurance will reimburse the lender if the purchaser should default on the loan.
Let’s face it, PMI is expensive.
But is it possible to get rid of the PMI? It is…
In order to cancel your PMI, you must have at least 20% equity in your home. Once you determine you have 20% equity, you can write to your lender to formally request the PMI be removed.
If you are not close to the required percentage but believe your home will appraise at a higher value than it did when you purchased the home, you can look into refinancing with a new appraisal. A new appraisal will cost you anywhere from $300 to $500 but if you get a higher appraisal giving you 20% equity, you can refinance without PMI. If the refinance doesn’t come along with a higher interest rate, the savings is worth the cost of the appraisal.
What if you purchased your home with a loan backed by the Federal Housing Authority, known as an FHA loan? The rules and restrictions are a bit different, and you will find they are a bit stricter.
With an FHA loan, the standard 20% down is not a requirement. The FHA loan allows you to purchase a home with as low as only 3.5% down, but you pay FHA mortgage insurance. This mortgage insurance is paid in two steps. First is the up-front insurance premium that is due at closing. The lender pays this to the FHA, then rolls the cost into your mortgage payment. You then pay monthly mortgage interest on the premium for the term of the loan.
So how can you get rid of the FHA mortgage insurance?
You must fall under the below criteria to have the mortgage insurance removed.
- Your loan opened prior to June 3, 2013
- Your loan is in good standing
- You have already paid on your loan for 5 years if you have a 30-year mortgage. Note: If you have a 15-year mortgage, the 5-year rule does not come into play.
- You have paid at least 78% of your loan.
If you do not meet the above requirements for an FHA loan but have enough equity in your home, you might still be able to get rid of the mortgage insurance by refinancing into a conventional loan without PMI.
Even if you just purchased your home within the last few years, this might be an option to investigate as home value have continued to rise in many markets.