Private mortgage insurance (PMI) policies insure banks in the event that a borrower defaults on mortgage payments.
This extra insurance can be helpful when you buy your home. It is traditionally required by banks when they lend to borrowers who have less 20% available for down-payment. Once you own your home, the benefit to you is over and the policy that your monthly insurance payment supports is nothing more than an insurance policy for your lender, paid by you! If possible, it is best to eliminate PMI as soon as you are able to do so. For example, eliminating a monthly mortgage insurance payment of $80 per month* could mean a savings of $960 per year and a savings of over $6,700 after 7 years.
5 Ways to Eliminate Private Mortgage Insurance:
Here are five ways you can stop paying private mortgage insurance and save:
1. Pay your mortgage down. Private mortgage insurance can be dropped upon request once your loan balance reaches 80% of the lesser of the original purchase price or appraised value of your home. If you pay down your principal mortgage balance to 80%, you can apply to your current mortgage servicer to have the mortgage insurance terminated. (There are two instances which require your lender to automatically terminate your PMI: 1. On the date that your loan was originally scheduled to reach 78% of the lower of the appraised value or purchase price when the loan was originated or 2. On the date that your loan reaches the midpoint of your loan’s amortization schedule. )
2. Refinance. If rates are low and you are confident that your mortgage amount is 80% of your home’s value or lower, refinancing your mortgage can serve two purposes – decreasing your monthly interest payments and eliminating private mortgage insurance.
3. Prove that your home has appreciated in value. If your home’s value has appreciated enough to provide a 20% equity position, you may be able to drop PMI payments by proving to your lender that your value has increased. This approach works well if you have made significant improvements to your home. It also works in a market where values are increasing due to buyers’ demand for real estate. Contact your lender to find out what their requirements are for dropping PMI due to an increase in your home value.
4. Pay your principal down with a 2nd mortgage. Many banks offer 2nd mortgages with interest rates a little higher than current first mortgage rates. If you qualify for a 2nd mortgage, you may be able to eliminate PMI and pay principal and interest only rather than mortgage insurance.
5. Ask your lender to pay the PMI. While lender-paid PMI can be advantageous, this arrangement is a trade-off and needs to be analyzed carefully. A borrower accepts a higher interest rate at closing in exchange for their lender purchasing a mortgage insurance policy at the outset of the mortgage term. Lender paid mortgage insurance can often result in lower monthly payments, but be careful if you consider this alternative. The higher interest rate will remain in place for the life of the loan. In contrast, regular mortgage insurance has a termination date and the monthly mortgage insurance payment will drop off several years prior to the end of your mortgage term.
Each of the alternatives above can provide benefits as you eliminate your private mortgage insurance. Depending on your situation, any one of them may be more helpful than another. Talk with a trusted loan advisor to help analyze which of the alternatives listed above would be best for you.
Kent Cochrum, Senior Loan Originator
(630) 330-1334 mobile
(630) 634-5136 office
CIBM Mortgage, a division of CIBM Bank , member FDIC
330 S. Naperville Road, Wheaton, IL 60187
*$80 per month is the typical monthly private mortgage insurance payment required for an average 30 year fixed loan amount of $217,000 with a 10% down-payment and excellent credit scores. Lower down-payment and/or credit scores will cause the monthly amount to increase. We regularly see clients who pay as much as $150 – $250 per month in mortgage insurance.
© 2016 Kent Cochrum All rights reserved.