Do you want to get rid of PMI? First, understand exactly what it is and how it works. PMI is a type of insurance that you’ll have to pay for when you take out a conventional mortgage – one not insured by a government entity – and you haven’t come up with a down payment of at least 20% of your home’s purchase price. Because a 20% down payment requires a lot of money — $60,000 if you are buying a $300,000 home – most people taking out conventional mortgages must pay for PMI.
The cost of PMI varies, but it usually runs 0.2% to 2% of your loan amount every year. If you’ve borrowed $300,000, then, you might pay from $600 to $6,000 a year for PMI. Usually, your lender will break the yearly cost of PMI into monthly payments that are added to your regular mortgage payment.
Equity is the difference between what you owe on your mortgage and what your home is worth. If you owe $200,000 on your mortgage and your home is worth $380,000, you have $180,000 in equity. Equity is important: If you have enough of it, you might be able to cancel your monthly PMI payments.
When can you get rid of PMI?
Your mortgage lender will automatically cancel your PMI payment once you build 22% equity into your home. To calculate the percent of equity you have, first estimate how much equity you think you have in your home. If you owe $270,000 on your mortgage and your home is worth $350,000, you have $80,000 in equity. Next, divide the amount of home equity, $80,000 in this case, by your home’s value, $350,000. This gives you about 23% equity. That would be enough for your lender to automatically cancel your PMI. If you don’t want to wait for building 22% equity, you can request in writing that your lender cancel your PMI when you reach 20% equity. Your lender will probably order an appraisal of your home to determine its current market value before agreeing to your request.
Enjoy the savings
Once your PMI is dropped, you might reduce your monthly mortgage payment by $100 or more, depending on how much you paid each month for this insurance. For instance, if you paid $3,600 a year for PMI and your lender broke that amount into 12 monthly payments, you’d see your mortgage bill drop by $300 a month. And that’s the good news about PMI: Yes, it’s no fun to pay for this insurance. But it’s only temporary if you keep making your mortgage payments each month.
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