What is mortgage insurance?
PMI is an insurance product that will repay your mortgage if you’re unable to. It’s designed to protect the lender in the event of default, as with this kind of insurance in place, they’ll still get the majority of the money owed to them, even if you can’t pay it. Given that mortgage insurance premiums can cost anywhere from 0.3% to more than 2% of your mortgage balance (depending on various risk factors), it can easily add hundreds of dollars to your monthly repayments, so it’s little wonder that so many Americans want to get rid of it. It’s something that can affect a lot of borrowers, too. A policy will usually be required if you make a down payment of less than 20% on a conventional mortgage loan, or if you’re refinancing (opens in new tab) and have less than 20% equity in your property. This is because the higher the loan-to-value (LTV) of the mortgage, the more risk the lender is taking on, and they’re looking to protect their investment accordingly. But, once you hit that magic 20% mark, you can start the process of getting PMI canceled.
When can mortgage insurance be canceled?
Once your level of equity reaches 20% and your mortgage balance falls to 80% LTV, you can request that your loan provider cancels the PMI contract as per the federal Homeowners Protection Act (HPA). You’ll have to do this in writing and will need a good payment history, and you may also be required to get a home appraisal to ensure that your home’s value hasn’t declined. But, if you tick all the boxes, you may be able to cancel your PMI contract and reduce your repayments in the process. It’s possible to get to this stage quicker by overpaying on your mortgage, or if you’re not in such a rush, you can wait for it to happen automatically. Provided you haven’t missed any repayments, the HPA states that the provider must terminate a PMI contract either once the mortgage balance reaches 78% of the original purchase price (automatic termination), or at the midpoint of the amortization schedule, if sooner (final termination). This means that, if you’ve got a 30-year mortgage term and you hit the 15-year mark, the insurance policy will be canceled, even if you haven’t fallen below 80% LTV. Again, to be eligible for either of these scenarios, you need to be up-to-date with your payments. Another way to reach that key point is to get your home reappraised if you believe it’s increased in value. If it’s been five years since you purchased the property the LTV must be no more than 80% for the insurance to be canceled, but if you’ve only owned your home for two years, 75% LTV is the maximum. However, remember that getting an appraisal can cost a lot of money in itself, so you’ll need to be confident that your home has gained in value – if properties in your area have seen price rises, for example, or if you’ve made a lot of improvements – to work out if it’ll be worthwhile. In a similar vein, refinancing your mortgage could be a way to remove the PMI if you find that, on appraisal, you’ve gained 20% equity ahead of schedule. This could be a particularly prudent move in the current low-rate environment; not only could you potentially take hundreds of dollars off (opens in new tab) your mortgage payment each month by refinancing to a lower rate, but you could save even more by removing PMI from your mortgage contract. As with the reappraisal route, just make sure that the fees associated with refinancing won’t make the endeavour unprofitable.
Is mortgage insurance required?
If you’re wondering is mortgage insurance required in the first place, and you want to avoid mortgage insurance altogether, one of the best ways to go about it is to put a larger down payment on your home. If you can put down more than 20% you’ll have a lower loan-to-value, which should mean the lender doesn’t require you to take out an insurance policy. Yet don’t be so focused on avoiding PMI that you fail to leave yourself any financial liquidity. Having some spare cash lying around for emergencies is always recommended, so when working out what mortgage you can afford (opens in new tab), try not to spend every last cent on making a bigger down payment if it’ll mean you’re struggling afterwards. Besides, for some, that extra amount each month could be a small price to pay for getting on the property ladder, with many finding that even with PMI added, they’re still paying less than they would have been on a rental contract. And, if you’re not in a position to avoid PMI at the outset, you may like to consider ways you can reduce the cost of such a policy instead, which means understanding the various risk factors that go into a PMI calculation. These include your mortgage term, LTV ratio and the amount of cover required by the lender, as well as your credit score. You’ll already need a decent score to be approved for a mortgage, particularly now that the credit score needed for such an approval has risen (opens in new tab), and typically speaking, the higher your score, the lower your PMI premium is likely to be. This means now’s the time to seek credit repair services (opens in new tab) if your score could do with a refresh. Yet even if you end up paying more in the way of PMI than you’d like, remember that it won’t be forever – there are several ways that mortgage insurance can be canceled, and after a few years, you can look forward to spending the premiums on something far more enjoyable.
