The cost of mortgage insurance is an extra expense that could amount to hundreds of dollars monthly. Unfortunately, it is quite difficult for a homebuyer to avoid paying for mortgage insurance when taking a home loan. Unknown to many, the dynamics of mortgage insurance is that it doesn’t benefit you, but instead, it benefits the lender. This is why it is important that you find ways of removing it from your home loan.
Suppose, you are looking at getting a home equity loan that offers you more flexibility when it comes to mortgage insurance then you should consider a Federal Housing Administration (FHA) loan. The FHA loan advantages are numerous.
According to the federal Homeowners Protection Act, every homeowner has the right to remove Private Mortgage Insurance (PMI) from their home loan in two ways:
- When you reach a specific home equity milestone, you can get automatic or final mortgage insurance termination.
- When you have also paid up to 80 percent home equity, you can qualify to remove PMI.
What is Private Mortgage Insurance (PMI)?
This is a mortgage insurance coverage required by the lender before giving you a home loan. In case you default on payment, PMI protects the lender from making a loss. PMI is required for most home mortgages with a down payment of less than 20%. However, it doesn’t apply to all mortgages.
Some examples are seen with government-backed VA loans and FHA loans, with zero or low down payment because these loans have different requirements and rules. Nevertheless, the more consistent you are with paying your mortgage, the more you increase your equity and increase your chances of removing the PMI.
Ways to Remove Mortgage Insurance From Your Home Loan
If you wish to get rid of your mortgage insurance, there are several ways to go about it. Here are some of the most reliable ways to remove your mortgage insurance:
Refinance Your Mortgage
Refinancing your mortgage is one way to remove your mortgage insurance from your home loan. If you notice a decline in the interest rates after taking a home loan, then refinancing your home loan might just be perfect. You can choose to pay off the balance of your current loan and take a new one. This saves you money in interest paid due to a lower rate, and can also get rid of your PMI if the balance of the new loan is lower than 80% of your home’s value.
Request Early Cancellation
Early cancellation is one good way to remove your PMI and save some money. Different insurance companies might have different policies regarding early cancellation. But generally, you can send a request for early cancellation of your PMI once you’ve reached about 20% equity in your home. You may need to contact your insurance company to confirm if you truly meet the requirements for the insurance removal.
Let It Cancel Automatically
Another way for your mortgage insurance to be removed is by letting it cancel automatically. Once you’ve made monthly payments for your mortgage for up to five years, the mortgage insurance cancels automatically without you taking any action. This is because you would have built up 22% equity for your home.
Get A New Appraisal
If you notice a rise in home value in the area you live in, it implies that the value of your home could have also increased. This could be due to the development of the area, or other factors. If you’ve also done valuable home remodeling on your home, it could increase the value of the home.
If this is the case, you can request for early cancellation of your PMI based on your home’s current value. You should request a new home appraisal to find out the new value for the home.
Importantly, before you can qualify to cancel PMI because of the improved value of your home the home must have been yours for up to two years. You must also own at least a 75% loan-to-value ratio (LTV), or 25% equity in the home. You can cancel the PMI with 80% LTV or 20% equity if the home has been yours for at least five years.
However, before getting a new appraiser which would cost you, confirm the loan rules and requirements for an appraiser. Some loans require specific appraisers to be used.
Removing your mortgage from your home loan can be a little bit technical, but it is very possible. If this is your target, it is important to seek advice from a professional on the processes and requirements involved. The expert has experience in dealing with such matters and would know the right step for you to take. This helps you avoid unwanted complications and helps save money as well.