Private mortgage insurance (PMI) is a type of insurance that protects the lender in case the borrower defaults on their mortgage. If you have a conventional loan and put less than 20% down, you may be required to have PMI. While PMI can be helpful for some homebuyers, it can also be expensive and unnecessary. If you’re paying for PMI and want to cancel it, here’s what you need to know.
1. Check Your Loan Documents
The first step in cancelling PMI is to check your loan documents. Look for information on when and how you can cancel your PMI. This information should be included in your loan agreement, as well as any annual disclosures you receive from your lender.
2. Calculate Your Loan-to-Value Ratio
Your loan-to-value (LTV) ratio is the amount of your mortgage divided by the value of your home. To cancel PMI, you typically need to have an LTV ratio of 80% or less. Calculate your LTV ratio by dividing your mortgage balance by your home’s value.
3. Get an Appraisal
If you believe your home’s value has increased since you bought it, you may be able to cancel your PMI sooner than expected. However, you’ll need to get an appraisal to prove your home’s value has increased. This can be costly, so weigh the benefits of cancelling PMI early against the cost of the appraisal.
4. Make Extra Payments
If you can’t get an appraisal or your LTV ratio is too high, you may need to make extra payments on your mortgage to reach the 80% threshold. Making extra payments can not only help you cancel PMI, but it can also help you pay off your mortgage faster and save money on interest.
5. Wait for Automatic Cancellation
Under the Homeowners Protection Act, your lender is required to automatically cancel your PMI once your LTV ratio reaches 78% based on your original purchase price. This means if you make all your payments on time, you should be able to cancel your PMI without any extra effort.
6. Contact Your Lender
If you’re unsure about how to cancel your PMI or have questions about the process, reach out to your lender. They can provide you with information on your options and requirements for cancelling PMI. Make sure to have your loan documents and LTV ratio on hand when you contact them.
7. Refinance Your Mortgage
If you’re unable to cancel your PMI using any of the methods above, you may want to consider refinancing your mortgage. Refinancing can help you get a new loan with a lower LTV ratio, which could allow you to cancel PMI. However, refinancing comes with its own costs and requirements, so make sure to weigh the pros and cons before moving forward.
Conclusion
Cancelling private mortgage insurance can help you save money on your mortgage and reduce your monthly payments. Whether you reach the 80% LTV ratio through extra payments, an appraisal, or waiting for automatic cancellation, make sure to check your loan documents and contact your lender for guidance. Refinancing may also be an option, but it’s important to carefully consider the costs and requirements before making any decisions.