It’s important to understand the rules surrounding PMI.
- Private mortgage insurance is a required insurance for many home buyers.
- You’ll typically have to pay PMI if you put down less than 20%.
- Once your house drops below 80% of the original value when you bought it, you will be able to have PMI removed from your loan.
Many homeowners must pay private mortgage insurance as part of their monthly mortgage payment. Private mortgage insurance, or PMI for short, is typically required for homeowners who put less than 20% down on their home.
Lenders mandate homeowners pay PMI when they make a small down payment because lenders want to ensure they don’t face uncompensated losses. If a borrower defaults on a mortgage, the lender can foreclose. But with a small down payment, it’s possible the home won’t sell for enough to pay off the loan and cover the lender’s costs. PMI ensures lenders don’t lose money under these circumstances.
Although homeowners pay for PMI, they don’t actually get any direct protection. They can still be foreclosed on if they can’t pay their bills. For this reason, many homeowners are eager to cancel PMI so they don’t have to keep paying hundreds of dollars a year for insurance that solely benefits their lender.
But is it possible to cancel PMI? Here’s what you need to know.
Here’s how PMI can be removed from a loan
The good news is, it is possible to cancel private mortgage insurance. You’re allowed to do this after you reach the date when your mortgage principal balance is scheduled to drop below 80% of the original value of your house at the time you paid for it. You can find out the date by looking at your PMI disclosure from your original mortgage documents, by looking at your loan payoff schedule, or by asking your loan servicer when it is.
If you make extra payments on your loan, your loan balance will fall below 80% of your home’s value earlier than the originally scheduled date. If that’s the case, you can ask your lender to remove PMI sooner than planned.
If your home goes up in value, you could also potentially see your loan balance drop below 80% of the current market price of the property, even if it is still above 80% of the original value …….