Canceling PMI on Conventional Loans

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PMI doesn’t last forever! Isn’t that the best news?

Now, knowing how to cancel is important too. It doesn’t just fall off your loan when you’re first eligible to eliminate it. If you wait until you owe less than 78% of the home’s value, then it does automatically fall off (it’s the law), but you can eliminate it before then with these steps.

Request PMI Cancelation in Writing

Once you know you owe less than 80% of the home’s value, write a PMI cancelation letter to your lender. State the reason for your request (you owe less than 80% of the home’s value) and provide proof. Keep in mind, if you sped up the process by making extra payments, you may need to pay for a new appraisal to prove the home’s value remained steady.

Other factors you should consider when requesting PMI cancelation include:

• Did you make your mortgage payments on time? When lenders cancel PMI, they don’t have the reassurance of repayment if you default on your loan. If you make your payments on time, they don’t have much to worry about. If you had late payments often, they may not honor the request.
• Make sure your other credit is in good standing. Some lenders check your credit or at least make sure there aren’t’ any other outstanding liens on the property before they cancel PMI.

Refinance your Mortgage

When interest rates fall (as they’ve done drastically lately), refinancing may make sense. Not only will it save you money on your monthly payment, but it may be a chance to eliminate PMI too. This works best if homes in your area appreciated recently, allowing you to borrow less than 80% of the home’s new value when you refinance.

This works best for borrowers that put down a significant down payment. Let’s say, for example, you put 10% down on the home when you bought it. Since then, your home appreciated 20%. You are well below the 80% threshold, which means when you refinance, you’ll borrow less than 80% of the home’s value and PMI won’t be necessary.

Pay for a New Appraisal

Sometimes paying for a new appraisal is all you need to cancel PMI on your conventional loan. If you don’t want to refinance, but you know your home’s value increased, this could be a good option.

Appraisals run between $350 - $500, but if you know your appraisal will show a much higher value, it may be worth it. Here’s how it works.

• If you’ve owned your home for at least 2 years, your new appraisal must show that you owe less than 75% of the updated appraised value to cancel PMI.
• If you’ve owned your home for at least 5 years, your new appraisal must show that you owe less than 80% of the updated appraised value to cancel PMI.

If the lender approves your request, you don’t have to refinance. The lender simply cancels the PMI and you get to enjoy a new, lower mortgage payment.

Waiting for PMI to Drop Off

If you don’t do any of the above, PMI naturally stops when you owe less than 78% of the home’s value. Your original amortization table shows when this occurs based on the amount you originally borrowed. As long as you made your payments on time, the table applies.

There’s also final termination, which requires lenders to cancel PMI once your loan hits the halfway point in the term. If you have a 30-year loan, the halfway point is 15 years. Most people don’t get to that point, though.

PMI Isn’t a Bad Thing

Many borrowers look at PMI as a bad thing and try to avoid it. If you have the money to make a larger down payment or can get a piggyback loan to help with the down payment, that’s great. But if you can’t, PMI isn’t that bad. It helps you secure conventional financing with all its attractive terms. Without it, you wouldn’t qualify for the conventional loan and may have to look elsewhere.

If you’re worried about PMI or you have questions about it, let’s talk. I’m happy to explain how it works, how you can avoid it, and most importantly when you can cancel it if you’re already paying it. I know it increases your mortgage payment, but sometimes it’s worth it to get the attractive loan terms you want.

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