One of the first things a home owner should do once he or she is getting close to 20% equity in their home is to start the process of getting Private Mortgage Insurance canceled. Private Mortgage Insurance (PMI) is aimed at reimbursing the lender in case a client defaults on a mortgage. But “paying private mortgage insurance is essentially the equivalent to throwing your hard-earned money in the trash,” says Than Merrill, real estate expert and owner of the real estate education website FortuneBuilders.
Getting out of a PMI can have significant benefit on one’s finances. Not only does it lower the monthly installment amounts, but it also boosts savings. The process of getting rid of PMI is a fairly straight forward one and should take a short time. Here’s a few steps for you to take:
Get a New Appraisal
This process costs between $300 and $500. For some lenders, canceling the PMI starts with a new appraisal of the property to determine whether one meets the 20% threshold. Usually, this fresh appraisal is based on the current rates rather than the original sales price.
Prepay Down the Loan
By putting some extra money towards the monthly installments, one can significantly decrease the amount you required to pay overtime and help a person get to the 20% threshold. The extra payment amount does not need to be significant. Increasing just $30 in one’s monthly installments can save you months of added payments.
Increase the Market Value of the Home
It is important for one to look for creative ways to increase the value of a home. Building a new room or remodeling the kitchen or bathroom are some ways to boost the value of a house. Once this is done, the lender can be contacted to calculate the loan-to-value ratio of the home again.
Contact the lender
Once one is confident that 20% of the mortgage is paid, the next step is to contact the lender to start the procedure.
What requirements should a person meet?
Although it is one’s legal right to have Private Mortgage Insurance canceled once they have 20% equity on their home, there are certain rules. Firstly, it is crucial to be current on payments and have a positive payment history for a certain period of time (usually 1-2 years). Also, a written request for cancellation of PMI is required. To determine whether the value of the home has increased, a new appraisal (or BPO – Broker’s Price Opinion) may be required. Most lenders will also require a person to prove they don’t have liens on the home.
So before you think you’re stuck with your PMI forever, follow these steps to see what you can do to remove it altogether. It’ll save you thousands of dollars over the course of your loan.