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Archives for : November2016

How to Get Rid of Private Mortgage Insurance (PMI)

Private mortgage insurance, or PMI, is insurance that you pay to your mortgage company when you put less than 20% down as a down payment on your home purchase. PMI serves as insurance to your mortgage company in the event you walk away from your home if the value declines below its purchase price. For a home buyer this insurance represents a very real (and pricey) expenditure that is paid each month until the outstanding principal on your home mortgage is less than 80% of the purchase price (your investment is 20% of the home purchase price).

The benefit of paying PMI is that you can purchase a home with less than 20% of a down payment, but the negative is the monthly cost of paying this amount. The easiest way to get rid of PMI is to make additional payments of principal into your home until you reach the 20% magic number. However, even when you reach the 80% you will need to write a letter to your mortgage lender and indicate to them that you no longer need PMI. If you do not reach out to them, they will wait until it reaches 78% before removal.

So real estate educators like Than Merrill of Fortunebuilders suggest “doing everything you can to not pay one month more of PMI payments than you have to”, and encourages people to do their due diligence to have it removed.

Here are some of the various strategies that can be used by borrowers to remove PMI even if you don’t have a 20% investment in your home.

One way to do so is with a separate loan from another lender. An example of this is with a personal loan from a third party lender whose proceeds you then use to make payments on your mortgage to reduce the principal loan below the threshold. Generally speaking, home lines of credit won’t qualify for this purpose as they represent a second mortgage on your home. A personal loan, either from a family member or third party lender will qualify and may be a worthwhile alternative to paying PMI, even if the mortgage loan has a lower rate of interest than your new loan.

Another way to get rid of PMI is with a new home appraisal. A home appraisal usually costs a few hundred dollars, but if your home has appreciated in value and could get you to a point of 80% LTV it would likely pay for itself in a month or two when you hit the magic number. If your home appraisal does not get you to that threshold in value, you may be stuck without the removal of PMI. Nevertheless, the new appraisal will be the basis for the loan to value ratio the lender uses going forward.

Another option to remove PMI is by refinancing your home mortgage loan. A refinance will not only lower your interest rate but trigger a new property assessment that will lead to the potential removal of PMI.

Homeowners have several different options for getting rid of PMI and should try do what they can to reduce the cost of their mortgage as soon as they are able.