Most people who put down 20% or more for a conventional loan do so to avoid an additional monthly payment of private mortgage insurance (PMI). This premium is included in the mortgage bill based on the size of the down payment, size of the loan, and buyer’s credit score and is implemented to protect the lenders in the event that the borrower can not pay back the loan. What some buyers don’t know is that you can get a conventional loan with as little as 5% down and eventually get rid of the mortgage insurance payment. Below are four different methods:
1. Submit a request to your lender for PMI cancellation
-Request must be in writing
-Pay down your mortgage to 80 percent of the home’s original value.
(ie: you buy a house worth $600,000 with a down payment of 5% or $30,000 which makes the loan amount $570,000. When you pay your loan amount down to $480,000 you are at 80% of the original value.)
-You must have a good payment history and be current on payments
(no 30 day or more late payments in the past year or a 60 day late payment in the past two years)
-Lender may require you to certify that there are no junior liens (like a second mortgage) on your home.
-Lender may require an appraisal (paid by the borrower) to prove the value of the property has not declined below the original value.
-Request usually can only be made two to five years after taking out the loan.
2.Wait for automatic PMI termination
Two ways to do so are:
-Lenders must terminate PMI when your principal balance reaches 78% of the original value of your home. This date is predetermined when the loan is first establighed and is based on the scheduled date the loan is expected to reach 78% of the original value. So, unfortunately paying down your mortgage faster will not apply to this method. Your payments must also be current otherwise PMI will not be terminated until they are brought up to date.
-Lenders must also terminate PMI if you reach the midpoint of your loan’s amortization schedule even if it is before the 78% date. This is the date of half the loans lifetime (ie if you have a 30 year loan the midpoint would be at 15 years)
*please note that termination request is different from cancellation request in that the lender must terminate PMI even if the principal balance of your loan has not actually reached 78% of the original value. (ie: because the value of the house has declined)
3.Negotiate PMI into the contract
-You can make a one-time upfront purchase of the mortgage insurance and this can be paid at the close of escrow possibly by the seller or even financed into the home loan.
-You must qualify with a lender which will require you to purchase a new appraisal, have 20% equity, and also pay lender fees.
Every private lender has different guidelines so be sure to check with them about their PMI cancellation and termination requirements. Also, these methods usually do not apply to FHA or VA loans.
As always, please feel free to contact me with any questions or real estate needs! LaurenW@hmsold.com