Private mortgage insurance or PMI is an insurance policy issued by private insurance companies for the benefit of the lender. If the borrower’s home goes into a foreclosure and selling the home cannot recuperate the loan’s outstanding balance, the private insurance company that issued the PMI will recompense the lending company with the difference.
Typically, lending companies require a PMI from borrowers who are considered high-risks or have poor credit standing, even if the loan to value ratio is 50% or more. A borrower is considered a high-risk if he or she has recently sold multiple homes, have foreclosed homes, or have an undocumented or unsteady income.
One best way of avoiding PMI is to start with not having it on the loan. When purchasing a new home but have no weighty down payment, a borrower can always ask the officer for various suggestions on how to avoid PMI.
Previously, the piggyback mortgage or the 80-10-10 was the popular option. Combined with a home equity loan, second mortgage, and down payment, it was used to lessen the loan to value ratio of the main mortgage. Some lenders may still offer this option today. However, for those who are now in a mortgage that has PMI, read on some of the options to get rid of it.
Meet the LTV ratio
Usually lenders will automatically remove the PMI if the borrower’s LTV is near their threshold specified initially in the mortgage papers. In practice, they usually wait until 78%. Yet, calling them and asking them will push them to remove the PMI sooner.
Also, keeping track of the home’s current market value is needed as most lenders determine the LTV off the property’s original price. If the home’s value has increased, get a professional appraisal and submit it to the lending company. Though obtaining a professional appraisal can be costly, this can be well-spent money than paying PMI for numerous months or years.
Refinancing the Mortgage
When refinancing a mortgage, make sure to weigh the monthly savings against the expenses. Also, make sure to compare between apples and apples. This means that if the current loan has 25 years left, request for a quote for a 25-year mortgage based on the existing loan balance and calculate the difference.
If the current loan entails PMI and the new one does not and has lower interest rates, then refinancing the mortgage makes a great option. To determine if refinancing saves money, the borrower needs to make sure that he or she has been living in the house for a longer period. Also, make sure to review the lender’s quotes and ensure that the new loan balance and terms should be the same as what is on the existing mortgage.
Nevertheless, purchasing a house without a substantial down payment often requires paying private mortgage insurance. Yet, understanding the terms of the existing mortgage and calculating the loan to value ratio are both needed to avoid paying the PMI longer than what is necessary. Moreover, knowing how and when to remove the PMI can help lessen the monthly mortgage bill. Hence, follow the provided options above now or on the next mortgage application. Make sure to understand the PMI procedures and ask for any clarification before signing the mortgage contract.