What You Can Do to Get Rid of PMI

Getting Rid of PMI Overview

To take PMI off your home loan, which can add up to $200 per month to your mortgage payment, you need to have 20% equity in the property. This can be through making your mortgage payments on time over the years, and also by appreciation. Many people in 2018 are pleased to discover their homes are worth more than they thought because of the 6% average increase in home values we are seeing across the country.

If you believe you have 20% equity in your property, you can request in writing that your lender cancel PMI. To prove that you have 20% equity, it may be necessary to pay for a new appraisal. This would be the case most likely if you have reached the 20% point with some amount of expected appreciation. If you have reached 20% by making your payments on time, you can refer to the amortization schedule that was included in your mortgage documents to show that you have reached 20% equity.

When you reach 78% loan to value, however, the lender is mandated by federal law to drop your PMI.

If you have an FHA loan that is backed by the Federal Housing Administration, things are different, however. FHA loans that were finalized after early June 2013 cannot have mortgage insurance cancelled � ever � unless you made at least a 10% down payment. In that situation, you can cancel your MIP (as it is called with FHA loans) after 11 years. This seems like a raw deal for people who have well above 20% equity and have an FHA loan. That is why if you are in this situation, it is recommended to refinance into a conventional loan when you have reached the necessary 20% point. Even if you have to pay a higher interest rate, you still could save money because you will no longer be paying for mortgage insurance.

How You Can Cancel PMI Faster

Almost everyone hates PMI! So how can you get rid of it even faster? Here are some important tips:

Refinance: If you have enough equity in your home with your conventional mortgage, you can do a refinance into a lower rate (in some cases) and not have to have mortgage insurance.
Pay for a new appraisal: The best way to prove that you have 20% equity in your home is to pay the $500 or so for a new appraisal. This will show the lender that you have sufficient equity (hopefully!) to not make PMI payments anymore. But before you pay for the appraisal, verify with your lender that they will accept this as proof that you have enough equity.
Pre-pay: You can always pay more on your mortgage every month to gain more equity in the property. Even paying an extra $50 each month can mean a major drop in the balance of your loan over several years.
Renovate: You can renovate parts of the home to increase its market value. Some of the best areas to focus on to increase value are the kitchen and master bathroom. Or, expand the family or living area. Then you can request the lender to recalculate your LTV with the new value figure.

Refinancing

When mortgage rates are lower, it is common for people to refinance into a lower rate and to also cancel PMI. Refinancing can work if your home has gained a lot of value since you got a mortgage last. If you bought your home four years ago and put 10% down, and your home's value increased by 15% since then, you owe less than 80%. You could refinance into another loan and not pay PMI. You may want to refinance if you can get a rate that is lower than what you have now.

However, we are in a rising interest rate environment in 2018, and you may discover that you cannot refinance without increasing your rate. In this situation, you may want to pay for a new appraisal instead and show the lender that you have at least 20% equity.