If you bought a home and put less than 20% down, you know the cost of private mortgage insurance (PMI) all too well. Lenders require it when you bring less money to the table to protect themselves if you can’t make payments.On average, annual private mortgage insurance premiums can cost between 0.05% to 1% of your loan. In Fairfax County, the median market value for a single-family detached home was $557,678 in 2014. Private mortgage insurance on a home loan of that amount can cost as much as $5,577 per year or $465 per month on top of your mortgage, property tax and homeowners insurance. That’s no small expense.
Fortunately, private mortgage insurance won’t be a thorn in your side for your entire mortgage. The Homeowners Protection Act provides three ways for you to remove insurance to save you from unnecessary cost.
Once your mortgage principal balance falls to 80% of the original home value you’re allowed to put in a request to cancel the insurance. You can make extra mortgage payments to speed up the process. Just make sure each time you make an early payment it’s allocated to principal and not interest.
What if you don’t have the funds to make early mortgage payments?
That’s OK, too. You can take a laid back approach and wait until you’re scheduled to pay your balance off to 80%. Then at that point, you can request to have your insurance removed.
The request for cancellation must be in writing. Your lender will consider your payment history and make sure you don’t have any liens against the property. They may also double-check the value of your home and schedule an appraisal to see if the value has decreased since you bought it. Unfortunately, your lender can reject your request for cancellation if your home value has decreased.
Even if you don’t put in a request for cancellation (or your request is denied), there are two instances where by law private mortgage insurance must be terminated by your lender.
When you pay off your principal balance to 78% of the original home value, your lender has to remove the insurance as long as you’re making on-time mortgage payments. If your payments aren’t current, the lender has to terminate insurance the first month after you become current.
Finally, if you struggle to pay principal down to 78% or 80% of your home value, your lender must terminate insurance when you reach the midpoint of your loan. Since a majority of mortgages have a 30-year term, you can look forward to insurance termination at year 15.
FHA loans come with private mortgage insurance, but don’t follow the same rules as above. The potential impact of private mortgage insurance through the entire life of your FHA loan is something you should consider before choosing it.
If you already have an FHA loan, refinancing to a conventional loan may be the answer to getting rid of your insurance. But, before making any decisions, speak with your lender to explore all of your options.
Interested in learning more about your mortgage options or prequalifying for a new home?