Private mortgage insurance is insurance that you purchase in order to protect your lender from major loss in case you default on your loan. Although PMI can be useful, as it can help people get a mortgage even if they are unable to save enough money for at least a 20% down payment, it’s still very unpopular. That’s why many homeowners are interested in finding out how to eliminate private mortgage insurance.
The cost of private mortgage insurance
The main reason to want to eliminate private mortgage insurance is to save money. PMI is a monthly expense, it takes away money that you could be using for something else. And, remember, you’ll never get that money back, since PMI only benefits your lender.
The cost of private mortgage insurance varies slightly from policy to policy. A borrower can expect to pay between $40 and $50 each month per $100,000 borrowed, or between 0.25% and 2% of the mortgage balance per year.
As time goes by, the amount of money you throw on PMI will grow larger and larger. You could end up spending thousands of dollars on it. So it’s no surprise that so many people want to get rid of it.
How to eliminate private mortgage insurance
You only have to pay for PMI until you acquire enough equity in your home so that the lender no longer considers your mortgage “high-risk.” If you’re paying PMI as part of your monthly mortgage, there are two ways to eliminate this portion of the payment with a cancelation of the policy:
- Borrower-prompted PMI cancellation
- Automatic lender PMI cancellation
Both depend on how much equity you accumulate. If you paid down the mortgage balance to the point that it is equal to 80% of the original purchase price, you can request a cancellation or termination of the PMI policy.
With automatic lender PMI cancellation, a lender won’t automatically stop PMI payments until you’ve accumulated 22% equity in the home. 22%, not 20%. The borrower has the right to cancel PMI at the 20% mark, but the lender won’t automatically do it until that 22% mark. This means that the borrower will just throw money away without having to do it. That’s why it’s important to keep an eye on your mortgage and eliminate PMI once you hit the 20% equity mark.