Typical mortgage payments usually include these 4 items, often referred to as PITI:
- Principal – the actual money you borrowed
- Interest – additional money paid as the cost of borrowing money
- Taxes – based on the property purchased and held in an escrow account until payment is made
- Insurance – coverage on the home in case of fire or other damage
There is one additional item homebuyers may pay each month. On a conventional loan, this is known as Private Mortgage Insurance (PMI) and is meant to protect the lender or servicer in the event of a loan default. PMI is typically required when the down payment made is less than 20% and is meant to lessen their risk on loan repayment. If you don’t have 20% down, the lender will cover this risk by requiring this private mortgage insurance. PMI is added to your monthly mortgage payment and is calculated on the size of your loan, your credit score, and the amount of your down payment.
There are 4 Ways to Eliminate PMI on a Conventional Loan
- Lenders must automatically remove the PMI from their loan payments once a homeowner has made enough monthly payments to pay the mortgage balance down to 78% of the purchase price.
- Homeowners can make a written request for PMI to be removed once their loan balance reaches 80% of the original purchase price instead of waiting for the lender to do it automatically at 78%. In fact, you can even prepay the principal to reach that 80% threshold faster if your circumstances will allow it.
- Sometimes getting a new appraisal will reveal that your current home is worth much more than the original price so that your current loan balance has fallen below the threshold requiring PMI. Appraisals usually cost $450-$600, so you’ll likely want to discuss with your mortgage and real estate professionals before ordering an appraisal.
- Refinancing your mortgage might offer several advantages. You may be able to take advantage of the new lowest refinancing rates which would lower your monthly payment, and remove the PMI all at the same time. This approach works if your home value has risen substantially since the date your loan was originally closed.
Federal Housing Administration (FHA) loans include mortgage insurance as well, but operate under different guidelines than the above, and the ability to cancel may largely depend on your loan origination date. If you have questions on how to figure PMI on FHA loans or how to eliminate this additional payment regardless of the loan you currently have. Our team is here to advise you on the best option.