Did you know you can avoid paying private mortgage insurance (PMI) if your home value has increased? Many homebuyers secure mortgages with small down payments, but most lenders prefer at least a 20% down payment. Without it, PMI is typically required, adding around $30 to $70 monthly for every $100,000 borrowed, according to Freddie Mac. "Its purpose is to safeguard the lender in case the borrower defaults on mortgage payments," says Christina McCollum, producing market leader at Churchill Mortgage.
Good News: PMI Isn’t Permanent
Once you’ve built up enough equity in your home, you can cancel PMI and reduce your monthly payments. With home values rising steadily, you might be at the threshold where you no longer need to pay PMI. The average home price saw a 5% increase year-over-year in the first quarter of 2024, according to the National Association of Realtors.
When Can You Cancel PMI?
You can cancel PMI once you reach 20% equity in your home. At 22% equity, it will automatically be removed. Equity can build through paying down your mortgage or an increase in your home's value.
For instance, if your home is valued at $500,000 and your mortgage balance is $400,000 or less, you have 20% equity and can request to cancel PMI.
Rising Home Values and PMI Cancellation
With home prices rising steadily, you might be closer to this milestone than you think. The National Association of Realtors reported a 5% increase in the average home price year-over-year in the first quarter of 2024.
"If you believe your property value increased substantially due to homes in your area selling for much higher, you should speak with your lender to understand what options you have to remove the PMI fee," suggests Brian Shahwan, a mortgage broker at William Raveis Mortgage.
Requirements for PMI Cancellation
Before you can cancel PMI, your lender may have specific requirements. Jeremy Schachter, branch manager at Fairway Independent Mortgage, notes, "They may require you to have the mortgage for a certain period of time before you can request to have it removed based on home appreciation."
Steps to Cancel PMI
-
Estimate Your Home's Value:
Use online tools like Realtor.com, Zillow, or Redfin for a rough estimate. For a more accurate assessment, you might consult the real estate agent who helped you buy your home.
John Aguirre, mortgage originator at Loantown, says, "Determining when you can get rid of PMI and verifying your home's value isn't an exact science."
-
Get a Professional Appraisal:
This is the most accurate way to determine your home’s value but usually costs a few hundred dollars. Christina McCollum advises, "You don't want to order an appraisal without first discussing it with your loan servicer."
-
Submit a Cancellation Request:
Once you confirm you have 20% equity, write to your loan servicer to request PMI cancellation. Ensure you are current on your payments and have no other liens on the property.
Buying a Home Without 20% Down
Purchasing a home with less than 20% down often means paying PMI, but it allows you to buy sooner and start building equity and wealth. Even if you have to pay PMI initially, you have options to remove it sooner, such as making extra payments or buying in an area with appreciating home values. Refinancing could also be a viable option if interest rates are favorable.
Understanding when and how to cancel PMI can save you money and make homeownership more affordable in the long run. Keep an eye on your home’s value and stay informed about your mortgage options to make the best financial decisions.