The best way to avoid paying private mortgage insurance (PMI) is not to have it on loan, to begin with. If you’re buying a new home but won’t have a significant down payment, ask your loan officer for tips on avoiding PMI.
In the past, a popular option was the 80-10-10 or piggyback mortgage, which used a combination of a second mortgage or home equity loan and your down payment to reduce the loan-to-value ratio of the primary mortgage. This may still be available through some lenders today.
But if you already have a mortgage with PMI, you have two options to remove it:
1. Meet the loan-to-value ratio.
If your loan is close to the 80% threshold or the threshold the lender stipulated in the initial mortgage paperwork, the lender will automatically remove PMI. In practice, most lenders expect up to 78%, but they’ll remove it sooner if you call and ask.
Since your lender will calculate LTV off of the original purchase price, you’ll need to keep track of the current market value of your home. In other words, if your home has increased in value, you can get a professional appraisal and present it to the lender as proof that the matter has increased.
While professional appraisals usually cost a few hundred dollars, this can be money well spent if it prevents you from paying PMI several months or years earlier than you otherwise would.
2. Refinance the mortgage
Before you refinance a mortgage, weigh your expenses against your monthly savings. Also, make sure you are comparing apples to apples. In other words, if you have 25 years left on your current loan, ask the lender for quotes for a 25-year mortgage on the current amount of your loan balance and see how the numbers add up.
If your current loan requires PMI and a new one doesn’t, and you also qualify for a lower interest rate, a refinance probably makes sense. For example, let’s say your current loan requires a 70% loan-to-value ratio before you can stop paying PMI, and your current loan-to-value ratio is 75%.
If your credit has improved since you applied for the original mortgage, you may be able to refinance to a new mortgage where the threshold for PMI is 80%. This means that you would not have to pay PMI with the new mortgage. But to determine if this refinance saves you money, look at how long it takes to recoup your closing costs through your monthly savings, and make sure you’re in the house that long. Again, and this can’t be overstated, be sure to compare apples to apples when reviewing the lender’s quotes: the new loan term and balance should be the same as your current mortgage.
Final words:
Paying for private mortgage insurance is often a necessary cost if you want to buy a home without a significant down payment. However, you should understand the terms of your current mortgage contract and calculate your loan-to-value ratio to avoid paying more than is strictly necessary.
Also, knowing when and how to eliminate PMI will lower your monthly mortgage bill. Follow the tips above and the next time you apply for a mortgage, make sure you understand the PMI rules and ask for clarification before you sign.
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