According to the National Association of Realtors, the median list price for homes is $232,000. If you have PMI of 1% that means you would have an annual private mortgage insurance (PMI) cost of $2,320, or $193 per month.
That's a lot of money!
More people should think about removing PMI, as this money could be put towards a retirement account, funding an emergency fund, paying off debt, and more.
If only I could rewind the last seven years and listen to my own advice!
In 2009, me and my husband bought a house but didn't have 20% down. We were taking advantage of the low housing prices and the first time homebuyer's tax credit.
One thing we didn't much think about was mortgage insurance and how much it would affect us.
Yes, we're human, and we made a mistake. While we no longer own that home (we are full-time RVers now), we do wish we would have found a way to not pay mortgage insurance.
The reality is that a lot of people make this mistake when getting a mortgage.
PMI can be bad because:
- It's expensive. PMI usually costs around 0.5% to 1.0% of a loan, and you pay that amount every single year. So, if your mortgage is for $150,000, you may find yourself paying $1,500 a year in PMI costs. That's $125 a month!
- It doesn't protect you. Just because PMI contains the word “insurance,” it doesn't mean it's something that will help you out later on. PMI is for the lender, not you.
- You can't always remove PMI. It's not easy to remove PMI from your mortgage, so don’t think you'll just pay PMI when you first get your mortgage and then quickly remove it. We will go through some of the steps below.
Here's what you need to know to remove PMI:
What is PMI?
First things first. We should probably go over what PMI is.
PMI is mortgage insurance on your home loan, however it does not protect you. Instead, PMI protects the lender in case the borrower stops paying their monthly mortgage payment.
PMI is often required by mortgage lenders if you're putting down less than 20% of the home's purchase price. So, if your home is $200,000 and you don't put down $40,000, you will most likely be paying PMI on your mortgage.
This applies to refinancing as well. If you're refinancing and you haven't paid more than 20% of your home's value towards your loan, you may have to pay PMI.
You may be able to remove PMI from your mortgage.
To remove PMI you will need at least 20% equity on your home. Once your mortgage balance drops to 78% and you've reached a specified date designated by your mortgage lender your lender, on a conventional loan, is then required to eliminate PMI as long as you are current on payments.
However, you may be able to remove PMI sooner. In some cases, you may be able to obtain a new home appraisal if your home has increased in value and you believe that you will have more than 20% equity in your home.
According to the Consumer Financial Protection Bureau:
The Homeowners Protection Act gives you the right to request that your lender cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80% of the original value of your home. This date should have been given to you in writing on a PMI disclosure form when you received your mortgage. If you can't find the disclosure form, contact your lender. You can also make this request earlier if you have made additional payments to reduce the principal balance of your mortgage to 80% of the original value of your home.
You may have to jump through some hurdles to remove PMI.
Removing PMI from your mortgage isn't as simple as just giving your mortgage lender the amount that is needed in order to eliminate the extra cost.
Sometimes you will have to ask your lender to remove PMI from your mortgage in writing. You have to prove you are able to pay your bills and mortgage payment, and you may have to get an appraisal to prove that your property's value hasn't dropped below where it was when you first received your mortgage.
Different lenders have different rules, so it is best to figure this out as soon as you can so you can start taking the required actions to remove PMI.
It's a little more difficult to remove PMI if you have an FHA loan.
If you have an FHA loan and put down less than 20% then you have a mortgage insurance premium (MIP). This is very similar to PMI, except it applies to FHA loans.
If you have an FHA loan, closed on your home after June 2, 2013, and had a down payment of less than 10% you are then unable to remove MIP from your mortgage. However, if you closed on your home before that date and have a 15-year term you can remove MIP when you owe less than 78% on your home.
You also may be able to get rid of MIP on your mortgage if you refinance into a conventional loan and have more than 20% equity.
In the end, it's best to research your individual options, contact your lender, and see what steps you need to take in order to remove mortgage insurance from your home loan. This will then allow you to put that money towards something more important!
Do you have PMI on your mortgage? Are you trying to remove PMI?
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