09/27/2010 Private mortgage insurance can be a confusing subject. If you've heard your lender talk about it and you're still confused, read on.
There is only one way to avoid PMI. To do this, the down payment you make on your home purchase must account for at least 20% of the purchase price. If you're unable to pay this, you'll have to make PMI payments each month in addition to your mortgage payment. There are other advantages to making a higher down payment as well, such as the ability to get one of the best mortgage rates available, but if you don't have the cash reserves, a low down payment with a higher rate and PMI on top of it all is probably your only option.
But don't worry. If you think you'll get stuck with PMI, start thinking of a plan to get out from under it as soon as possible. There are three ways to get rid of PMI once you have it. The following tips will help you.
1. Let your lender take care of it. Lenders are required to cancel PMI once the owner of the home has gained at least a 22% equity share in the home. In other words, once you've made enough mortgage payments that your home equity is equivalent to 22% of the total value, your lender will cancel the PMI. This is good news. But if you made a very low down payment, such as with an FHA mortgage or a VA home loan, this will take years.
2. Make extra payments, then call your lender. You're actually allowed to cancel your PMI yourself if you own at least 20% of the equity in your home. Start making additional payments immediately, if you can, and as soon as you have that %20 share, call your lender and ask them to cancel the insurance.
3. Increase the property value. If you made a 5% down payment and then the property value increased by 15%, you can cancel your PMI. That new 15% is considered yours, because you are the owner of the property. But property values typically increase slowly, if at all. Rather than wait around for this, take the initiative and try to increase the value of the property yourself. Sometimes a small addition to a home, such as a garage or a refinished kitchen, can increase the property value enough that you won't have to continue paying PMI. It may be financially worth it in the long run.
