Most people with private mortgage insurance (PMI) want to know how to get rid of it. And for good reason: PMI tacks on a substantial extra fee to your mortgage payments. Lenders traditionally require PMI for borrowers who put down less than 20 percent on a house. Of course, it’s a godsend if you couldn’t afford a home otherwise. Here, Realtor.com tells you how to let PMI go once you have it, potentially saving you hundreds if not thousands of dollars.
What is LTV?
To understand how to do away with PMI, you’ll first need to wrap understand the concept of a home’s loan-to-value (LTV) ratio—which compares the amount of money you borrowed with your home’s value. To calculate your LTV, divide your loan amount by the value of your home. For example, if you borrow $135,000 for a house valued at $150,000, your LTV would be 0.9, or 90 percent. Your LTV changes over time, and once it reaches 80 percent or lower, paying PMI is no longer a requirement.
How to get rid of PMI
There are two main ways to get rid of PMI, each with its own pros and cons. The most obvious is to just keep chipping away at paying your mortgage. It may take several years, but you will get there in due time without stressing your finances too much. Making extra mortgage payments will help you get there sooner, too. Another way to get rid of PMI is to make home improvements, such as adding a bathroom or renovating a kitchen. From there, you wait one year, then get the home appraised—hopefully for a higher value that pushes your LTV to a level where you can offload PMI. However, don’t fall into the trap of pouring too much money into renovations that could have gone toward whittling down your mortgage.
How to end PMI with your lender
Under the Homeowner’s Protection Act, your mortgage lender is legally required to cancel your PMI coverage once you pay down your mortgage to 78 percent of the principal, as long as you are current on your payments and do not have an FHA loan. Once your LTV is below 80 percent, ask your lender to cancel your PMI, making sure to follow its guidelines.
