If you fail to meet the 20% down payment for the loan, a lender will require you to get a private mortgage insurance (PMI). A PMI protects the lender in cases where the borrower defaults on the loan and puts the property to foreclosure. With that being said, it means that a PMI solely benefits the lender.
PMIs are expensive. It can amount to 0.5% to 1% of the monthly payments. If you know when and how to get rid of it, it may be beneficial to you in more ways than one.
It Is The Law
By law, your lender is required to inform you as to when your mortgage insurance will be canceled. This happens during the closing; you are told as to how long it will take you to pay down sufficiently to remove PMI.
The “PMI Cancellation Act” ( The Homeowners Protection Act of 1998) is an answer towards the call of many homeowners who have gone through so many difficulties just to have their mortgage insurances canceled. The act has defined the provisions for canceling the insurance. It also required that borrowers be informed about how and when it can be removed
Refinancing can get rid of PMIs
Know how much your house is worth. Once you have established that your property has increased in value, you can appeal for a PMI-canceling refinance in written form.
Lenders would usually allow you to refinance to get rid of PMI after two years. If you are planning to have a PMI-cancellation refinance for a loan which barely reached two years, you would not be approved of it.
How does refinancing get rid of your mortgage insurance? Let’s say you bought a house 2 years ago. The property has a market value of $150,000 and you loaned for $135,000. This means that it has an LTV ratio of 90%. This would have required you to pay for a private mortgage insurance.
Today, 2 years after, you decided to refinance, You’ve paid a sizeable chunk towards the loan over those years. From the original loan amount, you now have a remaining balance of $120,000. If in those two years, the value of your house has increased from $150,000 to a $175,000 and you now owe less, it is wise to refinance to get rid of the insurance.
So, the LTV ratio of a $120,000 loan balance to a $175,000 property value is around 68.57%. That is way below the 78% threshold, which means you can now opt to cancel PMI . That, and you can refinance to a much lower interest rate.
Are FHA MIPs Permanent?
Paying for FHA Mortgage Insurance Premium is costly. You do not need to pay for MIPs permanently. If you are on an FHA-insured loan and are paying high premiums, consider refinancing to a conventional loan. To get rid of your costly MIP, you must get rid of your FHA loan. With mortgage rates becoming low even with conventional loan, you can consider refinancing your loan to a conventional one to stop paying for expensive MIPs.
Refinancing to cancel a mortgage insurance doubles the savings. You do not only get rid of PMI but also reduce the monthly rate payments. It is always best to talk to your lender on the steps you’d like to take. You are protected by the law, and it is your right to know everything there is about your loan, including your PMI and how you can cancel it.