When you purchase a new home, many real estate experts will advise you to obtain certain types of protection, including homeowners’ insurance and title insurance, which shield you against financial loss resulting from defects in a property’s title (i.e., a document certifying legal ownership). Another type of insurance that protects a mortgage lender is PMI: private mortgage insurance. Lenders utilize PMI to mitigate the risk of loss on low down payment loans. As a borrower, you may likely wish to get rid of PMI in order to avoid suffering harsh consequences. Here are four ways to rid yourself of PMI.
What Is Private Mortgage Insurance?
Lenders usually require private mortgage insurance on mortgages for more than 80% of a property’s value. Should you default on a loan and go into foreclosure, the bank will recoup some of its money thanks to PMI and the sale of the home.
For instance, if your down payment is 5% of a home’s mortgage, your lending institution will demand a level of PMI that lowers the mortgage to an amount of less than 80% of your property’s value. For a 95% loan, your lending institution will usually require “30% coverage.”
Is PMI Expensive?
If you plan to purchase a home with less than 20% down, mortgage lenders who are more likely to offer high-ratio loans can be good news. However, PMI is often costly. Moody’s Investor Services reported that during the first half of 2018, PMI totaled $138.8 billion, an amount that marked a 14% increase from the same period a year prior. PMI is calculated as a percentage of the loan amount. Given that annual mortgage insurance is recalculated every year, the total cost of your PMI will decrease annually while you repay the loan. Traditionally, your credit score and down payment are both utilized to determine PMI.
Ways To Get Rid Of PMI
The Homeowners’ Protection Act (HPA), a federal law passed in 1998, allowed homebuyers to eliminate PMI and obligated lenders to disclose certain types of information about this type of insurance. Here are four common ways to get rid of PMI:
Paying Down Your Mortgage To 78% Of Purchase Price
The HPA created a “default” level for PMI. At this setting, the lender is required to immediately cancel PMI. More specifically, the lending institution must end PMI coverage once your mortgage’s outstanding balance falls to 78% of your property’s original value.
For example, if your home initially costs $300,000, the lender should cancel PMI once your outstanding loan amount reaches $234,000. This should occur even if you make no concerted effort to get rid of the PMI.
Paying Down Your Mortgage To The Midpoint Of The Term
Even should the amount of your outstanding loan not drop to 78% of your home’s original value, the lender must still eliminate PMI when a minimum of 50% of your mortgage term has passed. This applies even when a mortgage’s balance surpasses 78% of the property’s initial purchase price. Individuals with alternative mortgages (e.g., balloon-type, adjustable-rate) may not attain the 78% level even midway through the loan term.
Proving The Value Of Your Home Has Increased
If you can demonstrate that your mortgage’s outstanding balance is 80% or less of your property’s present-day value, you may be able to cancel PMI. The fact that property values often increase over time helps you in this respect. According to the Northern Virginia Association of Realtors ®, for example, the average home in Fairfax County sold for $611,109 in May 2019, a 1.57% increase from May 2018. You should always perform sufficient research and speak to an experienced realtor to analyze how the market has been evolving in your region. Getting an appraisal can also help prove your home is worth more.
Refinancing Your Mortgage
This option is typically recommended if your new mortgage is for 80% or less of your property’s present-day appraised value. If you have a government-backed mortgage, such as a Federal Housing Administration (FHA) loan (which typically requires lower credit scores and minimum down payments), refinancing may be your only route for eliminating PMI.
Speak To An Experienced Refinancing Company
Contact the real estate experts at Mathis Title Company in Fairfax, Virginia to learn more about the most effective strategies for getting rid of PMI. Our services include contract preparation and review (purchase agreements), mechanics lien, and agent services, title insurance, settlement, and refinancing. We serve many towns near Fairfax, including Arlington, Alexandria, Chantilly, and McLean.
Robin Mathis is an attorney who holds more than 30 years of experience and who was sworn into the United States Supreme Court. She will guide you through the refinancing process and collaborate efficiently with mortgage lenders. Call Mathis Title Company today at (703) 214-4020 or contact us online for more information about our work.