Whether you’re a first time home buyer, or simply upgrading to a larger home, if you don’t have enough equity in the property, you’ll need to pay private mortgage insurance (PMI). Currently, the cut-off for PMI is 20% loan-to-value (LTV) or greater equity. For example, if you put 5 to 10% down on your home, you’re going to be required to pay for PMI, while if you put 20% down on the property, you are not.
Lenders have their own formula for calculating just how much PMI you’re going to have to pay and this can be based on the value of the property, your credit score, and how much equity you have in the property. For example, a home worth $200,000 with a 5% down payment would require around $150 a month in PMI.
This makes your monthly mortgage payment higher and it is vital that homeowner’s account for this before purchasing a property to ensure that they can easily afford the payments. However, you’re not always going to have to pay for PMI and eventually those payments will drop down to just your standard amount for principal, interest and any property tax or home insurance you have on the property.
3 Ways to Get Rid of Private Mortgage Insurance
- There are three ways to get rid of PMI and start enjoying lower payments on your home loan. The first is merely to keep making your standard payments and wait for your equity in the home to grow to 20%. This can take time, but if you don’t have the option of paying extra on your mortgage every month, this may be the best solution for you.
- The second option is to start making higher payments every month to accelerate how much equity you have in your home. This can take some discipline and while it is faster than simply making your regular payments, it will still take time to earn back your equity in the property. However, every little bit helps and the faster you can get the loan paid down, the quicker you’ll be able to save that additional amount every month.
- The last way to get rid of PMI is perhaps the easiest and for most homeowners, it’s going to be the best solution since there are numerous benefits from utilizing this method. If you refinance the property, you will not only be able to take advantage of a lower interest rate, which will save you money, you can also have the property re-appraised and chances are, your equity amount is going to exceed 20%. If you still don’t have that magic 20% equity, you can get additional money on your refinance and use this to pay down the loan so that you will get the equity you need to get rid of your PMI payments.
Whichever of the three options you choose, you will eventually stop having to pay for private mortgage insurance. A smart decision once you’ve reached that milestone is to keep applying that money towards your monthly payment in order to pay down your loan even faster and keep adding to the equity you own in your home.