January 12, 2018

Still paying PMI? Here’s what you can do

Simple. Thrifty. Living.

Many home buyers have difficulty coming up with a twenty percent down payment, the traditional amount that mortgage lenders prefer. If you were one of these buyers who put down a lesser amount, you were probably required to purchase private mortgage insurance to protect the lender. Fortunately, you don’t have to pay for PMI for the duration of the loan. Once you reach a certain level of equity, you can have the coverage canceled.

You may have excellent credit and still be forced to take out PMI. If you purchased a $200,000 home with less than a $40,000 down payment, the mortgage lender will likely require the purchase of private mortgage insurance, which will cost you 0.3 -1.5 percent of the original loan annually. This insurance protects the lender in case you default on your mortgage and your home goes into foreclosure. PMI is simply a business requirement and not a judgment about your trustworthiness. However, the premiums do add a significant amount to your home expenses each year, so you should have the requirement for PMI canceled as soon as possible.

Some lenders may waive the PMI requirement on non-traditional loans. Usually, these loans carry a higher interest rate, so your monthly payments will still be higher than those for people who put down 20 percent or more on their homes.

Your lender cannot require you to maintain PMI once your home’s loan-to-value ratio drops to 78 percent or below. For instance, if your home was appraised at $200,000 but you now have $50,000 equity in the property, your lender must drop the requirement. Experts recommend that you keep track of your LTV ratio and request the requirement be dropped once you have reached 80 percent. Your lender may drop the PMI requirement early. If not, they will be reminded that you are nearing the 78 percent mark and cancel your PMI in a timely manner.

The PMI requirement actually helps many people get loans that would otherwise be out of reach. The additional expense can be a burden, but it can get you into the home of your dreams. Just be sure to track your LTV ratio so that you do not pay PMI any longer than necessary.

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