A lender requires you to purchase mortgage insurance if you bought your house with less than 20 percent down. This is also true if you refinanced with less than 20 percent equity. The lender requires this so that they are reimbursed if you default on your loan. This mortgage insurance is called Private Mortgage Insurance (PMI) and can be quite costly. However, it is possible to get it removed once you have met certain requirements.
How to Cancel PMI
If you have at least 20 percent equity in your home, you may then go to the lender and ask them to cancel your PMI once you have paid down the balance to 80 percent of the original appraisal value of your home. When it has fallen to 78 percent, the mortgage servicer is required to cancel PMI.
Methods to Remove PMI
There are a few different ways you can remove PMI. The first involves you refinancing your home, which if your home value has gone up a significant amount, the new lender won’t require mortgage insurance. You can also try getting a new appraisal of your home. Certain lenders will consider the new appraisal value rather than the old one to determine if you have at least 20 percent equity. Be aware that an appraisal will cost an average of $550 give or take a hundred dollars, so before spending the money, determine first with the lender’s help if your specific situation would benefit from acquiring a new appraisal to work from.
There are also two other options available to you. If you have some extra cash, you can continue to prepay your loan down. As suggested by Bankrate, even paying “$50 a month can mean a dramatic drop in your loan balance over time.” The final option available to you is remodeling. This one will be the most expensive of all of the options, but if you do remodel your home, you go to the lender and have them recalculate the loan-to-value ratio using the new value figure due to the upgrades.
Other Requirements You Have to Meet
There are four key requirements that you must also meet according to the Consumer Financial Protection Bureau (CFPB). Firstly, you must request the removal of PMI in writing. You have to be current and in good terms in regards to your payment history, prove that you do not have any other liens on your home, and may have to get an appraisal so you can show that your loan balance is not higher than your home’s value by 80 percent.
Be aware that the lender must inform you at closing how many years and months it will require for you to pay down your loan to the point where you can cancel PMI. Each year, mortgage servicers should send out an annual statement with contact information for you to go about canceling PMI. Check if you meet the requirements and determine which method to cancel PMI will work best for your own situatio