First-time homebuyers are often all too familiar with PMI and the double-edged sword it brings to the table.
The positive part of PMI (private mortgage insurance) ensures you are actually able to qualify for a mortgage and move into your very own home. The negative piece of the equation is that it comes with a price, sometimes adding hundreds of dollars to your monthly mortgage payment.
This financial burden can be a thorn in the side of the homeowner for years as they slowly build equity before reaching the point where it can be removed from the mortgage. Below you’ll find why this insurance is often a necessary evil in the home buying experience. Learn creative ways to get rid of PMI or lessen the time it is part of your monthly payment.
What is PMI and why do I need it?
Typically, PMI is required if you are getting a conventional loan with less than a 20 percent down payment. The insurance protects the lender in case you end up defaulting on the loan. If it is required, you’re probably looking at paying an extra .3 to 1.5 percent of the mortgage.
Your credit score, amount of the actual loan, and the down payment all play into the calculation of how much the mortgage insurance will be. With each ensuing year, it will be recalculated based on how much of the loan has been paid off.
The type of loan you get will often dictate whether a PMI will be attached to it. Some government-backed loans like VA and FHA have different rules when it comes to the need for insurance. Even private lenders may not require PMI but often the catch is that the interest rate on the loan tends to be higher than the market rate.
How Can I Get Rid of my PMI?
There are several creative ways to get rid of PMI from an existing mortgage. Check out a few of the options available and determine which one fits your individual needs:
Compare all Loans to Determine Which is Best for You
Your lender should take the time to explain the various loan options available to you. From conventional loans to government-insured loans to adjustable-rate mortgages, there is a wide range of loans sure to fit your needs. Some will require a PMI; others won’t depending on your circumstances, the available interest rate, and your operating budget.
New Home Appraisal
As real estate values have skyrocketed in the Denver area, it’s worth having your home reappraised as your home equity may have quickly risen. If your loan balance is 80 percent or less based on a new valuation, you can ask for the PMI to be removed.
Increase Monthly Mortgage Payment or Make an Extra Payment Each Year
By adding an additional $50 or $100 to your monthly payment, you can reach your goal of PMI elimination much faster. Check the date on the PMI disclosure form to find out when you are scheduled to get to 80 percent of your home’s value.
The Bottom Line
Make sure you’re aware of your rights related to the PMI. There should never be excessive charges and you have the right to eliminate PMI once you’ve reached the 80 percent threshold. Before you sign the PMI papers, make sure you understand all the rules and the schedule of when the PMI will be paid off. Keep track of where you are with the payments and when the anticipated payoff will occur.
This payment can be frustrating but it often comes with the territory as a first-time homebuyer, especially when you can’t come up with a 20 percent down payment. Don’t make yourself crazy trying to get rid of PMI at the expense of your other savings or financial goals. Take a balanced approach and take the long-term approach. Most likely, PMI will be part of your life for only a short period of time.