How to Get Rid of Private Mortgage Insurance

If you want to buy a home, you more than likely need to borrow money. Normally you would have to come up with 20% of the purchase price in order to qualify for a loan, but because the economy hasn’t been great for awhile there are any number of lenders who’ll allow you to take out a loan for more than 80% of the entire amount. However, the lender will want you to pay for private mortgage insurance (PMI) so they can be sure to get their money if you default on the loan. Some people find PMI to be intrusive, and unnecessary, so they want to stop paying it. Following are a few tips on how to get rid of private mortgage insurance.

What Is Private Mortgage Insurance?

Private mortgage insurance, also known as lenders mortgage insurance (LMI) is required by law if your homeowner’s loan exceeds 80% of its value. The insurance is paid by you to indemnify the lender in case you default on your loan. You must carry private mortgage insurance until your equity in the home is more than 20% of its worth--unless you make special arrangements.

Why Get Rid of PMI?

Although the law that instituted private mortgage insurance--the Homeowner Protection Act, of 1998--has helped a lot of people borrow money for a home who wouldn’t ordinarily be able to, making the extra insurance payment every month, especially when you know you’ll never see any return for your expenditure, is something most people want to get out of as soon as possible. Because the borrower knows they’ll never see any money from the insurance company no matter what happens, most people want to stop making the payments as quickly as they can.

Ways to Cancel Your PMI

There are a couple of ways to get out of paying private mortgage insurance, but they may involve making payments with higher interest rates. The only way to cancel your PMI without taking out a high interest loan is to make the payments until you have 20% equity in your home. Otherwise you’ll have to make arrangements to take out an additional loan to satisfy the lender. Talk to the lender and find out what you’ll have to do cancel your PMI. In most cases you’ll have to take out a supplementary loan to pay down the difference between what you owe and the 20% figure. Another method is to pay more than the required amount of your monthly payments until the principal is less than 80%. Because the lender is required by law to notify you when you reach that point you will know when your private mortgage insurance will terminate. To be sure you’re aware that the time is approaching, you should keep track of the amount you’ve paid off, and then you can make sure the lender actually discontinues the insurance at the proper time.

Increase in the Home’s Value

Another way to get out of paying for private mortgage insurance is for your home’s value to increase. If you believe your home’s value has gone up, you may be able to drop your PMI because the amount you’ve already paid will exceed the 20% equity mark. You will have to approach your lender and provide proof that the home’s value has indeed increased. You should be aware that this process can be lengthy--it’s not unusual for the lender to take more than a year to investigate your assertion that the home is worth more than it was previously.

Consult Your Lender

If you’d like to get out of your PMI, you should consult your lender and find out what terms they require for you to drop the insurance. Some lenders require you to carry private mortgage insurance for a specified period of time regardless of how much equity you actually have in the home. Keep track of your mortgage payments and be aware of how much equity you actually have in the home. Be sure and make your payments on time so your lender may be more inclined to let you take out an additional loan

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