Dear Liz: I bought my first home about a year ago. Because I had very little money for the down payment, I have to pay private mortgage insurance, which is a whopping $385 each month. My burning question about this is: How can I get rid of it? There must be a way to pay the loan quicker or pay more each month or something to make it go away.
Answer: Mortgage insurance protects the lender in case you default on your loan. Since loans with small down payments have a higher risk of default, mortgage insurance is typically required until your balance falls to 80% of the original value of your home. At that point, you can request in writing that the mortgage insurance be canceled. If you don’t make the request, the lender is still typically required to terminate PMI when your balance reaches 78% of the home’s original value.
To speed that day, you can pay down your principal, but do it the right way. Call your mortgage servicer and ask how to be sure the extra money you submit is reducing your mortgage balance. Otherwise, your extra money may just be applied to the next month’s payment, which won’t help reduce your balance much.
A borrower can include a letter with your payment check to the lender to apply all extra money toward principal. It doesn’t need to be a phone call.
That might work, or the lender might simply apply the money to the next payment, regardless of your specific instructions. It’s best to call the lender and ask the best way to set this up.
If the loan is an FHA loan dated after the summer of 2013, the borrower may need to refinance to get out of paying PMI once they reach 78% LTV. New FHA loans with no money down require the PMI to be paid over the life of the loan regardless of LTV.
There is a nice chart on this page that shows the old and new rules:
http://www.fha.com/fha_requirements_mortgage_insurance
If the value of your home increases later, you can refinance and the 80% will be calculated against the new value of your home. That is what we did.
If I understand you correctly, you mean you refinanced into a loan that didn’t have PMI, because you had 20 percent or more equity. Is that right?
Does the 78% of the home’s original value still count if you’ve recently refinanced? Does the 78% start all over? thanks
A refinance is typically a new loan, which restart the clock. But ask your lender.