Dropping Private Mortgage Insurance
If you plan to purchase a house with less than a 20% down payment for a mortgage your mortgage lender will most likely tack on the extra cost of requiring you to carry private mortgage insurance as a standard precaution.
As your home grows in value it could be possible to drop this required private mortgage insurance. But when does private mortgage insurance go away? Exactly when can you drop it?
Whether the mortgage qualifies for this insurance removal will depend upon factors like how much is still owed on your current mortgage balance and how dependable your payment history has been.
Home equity is rising at a very rapid pace. In the third quarter of 2021 reports from CoreLogic show that homeowners with mortgages averaged an equity increase of about 30% year over year which is an average of $51,500 per mortgage holder.
Due to this significant increase, it could be a good time to look into the possibility of canceling private mortgage insurance on your home loan. The higher amount of equity within your home can lower any perceived risk from the lender and in many cases, it could lead you to be able to drop this extra cost much more quickly.
In some cases, private mortgage insurance can add tens of thousands of dollars over the entire life of a loan so it is important to try and take steps to drop private mortgage insurance as soon as you possibly can.
A Quick Overview of Private Mortgage Insurance
Private mortgage insurance or PMI is a type of insurance that helps protect the lender if a borrower stops making the monthly loan payments. This type of insurance is most often required when a borrower seeks approval for a conventional mortgage and makes a down payment below the standard 20%.
If you are unable to make these required mortgage payments for any reason at all and the property gets to a point of going into foreclosure the private mortgage insurance helps to cover the lender against the losses.
A majority of homeowners who are required to have private mortgage insurance have borrower-paid private mortgage insurance where they pay an additional monthly fee on top of their monthly mortgage payment.
Recent data from the National Association of Realtors has shown that the average down payment for brand new mortgages in 2020 was 13%. The average first-time homebuyer made a down payment of around 7% while those who were purchasing another home put down an average of 17%.
It is not uncommon to pay private mortgage insurance as there are a large number of American homebuyers who are doing so. In many cases, homebuyers have found that paying the extra charge is worth the ability to own a home and begin building equity.
Factors That Let a Homeowner Drop Their Private Morgage Insurance
Mortgage holders automatically qualify for private mortgage insurance cancellation once the property reaches a 78% loan to value ratio. This is a rule outlined by the homeowner’s protection act or the PMI cancellation act of 1998. This rule is also sometimes referred to as HOPA and it states that homeowners have the right to have any private mortgage insurance removed automatically on the date that the principal balance is scheduled to reach the 78% of the original value of the home they paid when they purchased it.
So, if you bought a home for $300,000 you automatically qualify for PMI cancellation when the balance is at $234,000.
For this auto cancellation to occur a homeowner needs to be current on all of their payments. One thing auto removal does not take into account however is property upgrades and market appreciation. It is only based on the original purchase price of the home.
You have an official appraisal conducted to show how much your home has gained value
You can request private mortgage insurance canceled when you reach at least 20% equity in your home. You may reach this by making extra payments to the mortgage balance but you can also get to this required benchmark faster in a hot market where home values are increasing rapidly or by investing in home improvements.
If you are purchasing a home or plan to purchase a home soon and will be required to carry private mortgage insurance there are a few ways in which you can strategize to drop this extra required payment more quickly than stated in the mortgage payment paperwork.
If you reach an 80% loan to value ratio you can request a removal
The HOPA rule also states that homeowners can have mortgage insurance removed upon their request when the principal balance of the mortgage drops to 80% of the original value of the loan. So, using the $300,000 example, this would mean that the borrower can request the insurance be removed from their monthly payment when they hit a balance of $240,000.
You can reach this 80% more quickly by making larger payments to the mortgage than the monthly required amount. You can also set a notification for the date you would be scheduled to reach this 80% to remind you to contact your mortgage servicer.