You wanted to be the proud owner of a new home. However, at the time of purchase, you were not able to put down more than 20% in cash. As result, your lender insisted on a private mortgage insurance. Just in case you were thinking of defaulting on your loan. If ever there was a necessary evil, then PMI seems to fit the description. The sole beneficiary of the PMI is the lending institution, while the buyer is left incessantly obsessing about how to get rid of PMI.
Private mortgage insurance is wrapped up in the contract of the house deed and adds a sizeable chunk to your monthly payments. Many people don’t even realize their bank accounts are being stripped of sums of anywhere between $40 and $500 a month. There are methods to get unstuck, though. In certain circumstances, the bank must release you from the financial bondage.
How to Get Rid of PMI in a Hassle-Free Manner
The Homeowners Protection Act – Safekeeping from PMI Abuses
Granted, lending institutions need to protect their loans. Otherwise, what’s to stop a homeowner from defaulting and pushing the mortgage into foreclosure? The type of insurance policy banks and other lenders lean on is called a private mortgage insurance.
To start with, you need to learn the distinction between a PMI and a mortgage life insurance. The latter is designed to guarantee you or your loved ones will receive a tax-free benefit in the event of an accident or death.
However, some issuers could not resist the temptation to abuse the PMI policy by continuing to pursue payments even when the homeowner was not legally required to pay any more, as stated by the Homeowners Protection Act. This legislation passed in 1998 and became effective July 29, 1999.
It required the lender to drop any more charges on the homeowner’s bank account once the equity level was reached. That meant less than 80% of the purchase price on the loan. When the homeowner crosses the 78% threshold, then he’s free of any more payments. However, it should be noted that the lender does not have to terminate the PMI before the scheduled date on which you’re supposed to pay up to 80% of the original value of the house. This date will appear on a PMI disclosure form you received as part of your mortgage.
The Homeowners Protection Act also draws out some ground rules for canceling and terminating PMI policies. There are three ways that will show you how to get rid of PMI:
- Automatic termination.
- Requested cancellation.
- Final termination.
We’ve already covered this type of PMI cancellation. Your lender is required by the Act to terminate the private mortgage insurance on the date when you cross the 78% threshold of the original value of your home.
However, if you’ve strived towards completing those payments earlier than the scheduled date, the last thing you want is to keep up signing off up to $500 to your lender until the automatic termination comes into effective. The alternative is to request cancellation of PMI coverage. Next, we’ve exposed a few ways on how to get rid of PMI sooner rather than later.
Before clearing the path for a few tricks on how to get rid of PMI, make sure you fulfill the requirements to even file a request for a cancellation:
- Submit your request in writing.
- You need to have a ‘good payment history’. It translates to having paid all your monthly fees in due time in the first 12 months of the last two years of the cancellation.
- You need to provide evidence, such as an appraisal, that the property’s value has not decreased below the value of the home when you first purchased it.
- Your lender might ask for certification that your home equity is not subjected to a second mortgage. Otherwise known as subordinate liens.
Making Home Improvements to Increase the Appraised Value
Making good on your mortgage payments may be one way to cancel your PMI earlier. However, to get to the required minimum, you can also increase your home’s value by upgrading it. Home improvements such as kitchen, bathroom, and basement remodels or deck additions have a high return on investment. Once the resale value goes through the roof, the PMI will become obsolete and redundant. It’s through a combination of appreciation and amortization that you’ll be allowed to drop your PMI.
You can contact a local appraiser and ask for a ‘PMI Cancellation Consultations.’ In return for paying anything between $300 and $500, you can get an appraisal and find out if you’re in the ballpark already.
The equation goes like this. Multiply the amount left on your mortgage with 1.25. If it comes out at less than the new appraised value, then you should be granted PMI cancellation.
Increased Property Value for a PMI cancellation
This principle works on the same rules governing the ‘home improvements’ cancelation. If property value in the neighborhood has gone up since you bought your house, then appraise it again and see if the amount remaining on your mortgage multiplied by 1.25 is less than the new value. If that’s the case, this is how to get rid of PMI labor and stress-free.
Refinancing May Be a Handy Solution, While Also a Costly Deal
If you’re not eligible for an automatic cancellation yet, find out if your home’s value has appreciated. Then you can opt for refinancing. However, before you sprint into another loan and all the paperwork yarn around it, make sure you do some serious number crunching.
First, think of the costs associated with refinancing – title and escrow, document preparation, and other third-party fees. Then consider them against the amount you’d save by getting rid of your PMI. If it makes financial sense for you, refinancing might just well be the road out of PMI city.
Contrary to what the name might suggest, final termination doesn’t happen right at the end of your loan’s amortization schedule. Rather, at midpoint level when your payments are halfway through the life of your loan. Seeing how loans have a 30-year lifespan, the midpoint would occur 15 years after signing the PMI.
Unless you’re a lender, then you might end up nurturing some strong negative feeling against the trinity of words- private mortgage insurance.
People look for ways on how to get rid of PMI. It hangs around their new homes like an unwanted ghost. Tracking your eligibility progress means you can take the appropriate steps when time comes to cast out those PMI ghastly payments from your account.