Private Mortgage Insurance (PMI) is often required by lenders when a borrower makes a down payment of less than 20% on a home. Managing and eventually cancelling PMI can save homeowners money. This article provides practical tips to handle PMI effectively and reduce costs.
Understanding PMI and Its Costs
PMI protects the lender, not the borrower, and is an added expense for homeowners with less than 20% equity. Typically, PMI costs range from 0.3% to 1.5% of the original loan amount annually. Knowing how PMI is calculated helps in planning for its cancellation.
Strategies to Manage PMI
One effective way to manage PMI is to increase your home equity. Making extra payments toward your principal reduces the loan balance faster. Additionally, refinancing your mortgage once you reach 20% equity can eliminate PMI altogether.
Cancelling PMI
Federal regulations allow for PMI cancellation once you have at least 20% equity based on the original purchase price or current market value. You can request cancellation when your loan balance drops to 80% of the home's value.
Homeowners should regularly monitor their equity and request PMI removal in writing. Lenders may require an appraisal to confirm the home's current value before cancelling PMI.
Additional Tips
- Maintain good credit: A higher credit score can help qualify for better refinancing options.
- Keep documentation: Save records of payments and home value assessments.
- Stay informed: Understand your loan terms and rights regarding PMI cancellation.