Done For You Article - What is Mortgage Insurance and How Do I Get Rid Of It
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If they have an FHA or Conventional loan with mortgage insurance they might still be able to save some money each month—since home values have gone up a lot over the past 3 years..
This months Done For You Article- What Is Mortgage Insurance and How Do I Get Rid Of It?
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Understanding Mortgage Insurance on a Conventional Loan and How to Get It Removed OR Another Possible Title could be-
HOW CAN I GET A LOAN IF I DON’T HAVE 20% TO PUT DOWN?
When buying a home, many people take out a mortgage, which is a loan specifically for purchasing property. If you're getting a conventional loan (the most common type), you might have to deal with something called mortgage insurance. Let's break down what mortgage insurance is, why you might need it, and how you can get rid of it when the time is right.
What is Mortgage Insurance?
Mortgage insurance, also known as Private Mortgage Insurance (PMI), is a type of insurance that protects the lender, not you, if you stop making payments on your loan. Lenders require PMI because it reduces their risk. If you default on your mortgage, the insurance helps cover their losses. PMI is typically required if you put down less than 20% of the home's purchase price as a down payment.
Why Do You Need PMI?
Lenders see loans with a down payment of less than 20% as riskier. To compensate for this risk, they require PMI. While PMI helps you buy a home with a smaller down payment, it does come with additional costs. PMI is an extra monthly fee that gets added to your mortgage payment. It doesn't benefit you directly, but it's a necessary step if you want to buy a home without having to save up a massive down payment.
How is PMI Calculated?
The cost of PMI can vary based on several factors, including the size of your down payment, the loan amount, and your credit score. Generally, PMI costs between 0.3% and 1.5% of the original loan amount per year. For example, if you have a $200,000 mortgage and your PMI rate is 1%, you'll pay $2,000 a year, or about $167 a month.
How to Remove PMI
The good news is that PMI doesn't last forever. There are a few ways you can get it removed:
Automatic Cancellation: By law, lenders are required to automatically cancel PMI once your loan balance reaches 78% of the original purchase price or appraised value of your home, whichever is lower. This typically happens when you've paid down your mortgage for a certain number of years.
Request Removal: You don't have to wait for automatic cancellation. You can request that your lender remove PMI once your loan balance reaches 80% of the original purchase price or appraised value of your home. To do this, you'll usually need to have a good payment history and be current on your mortgage payments.
Home Value Increase: If the value of your home has increased significantly since you bought it, you might reach 20% equity faster than expected. In this case, you can request a new appraisal to show that your loan balance is now less than 80% of the home's current value. If the appraisal confirms this, you can ask your lender to remove PMI.
Refinance Your Loan: Another option is to refinance your mortgage. When you refinance, you take out a new loan to replace your existing one. If your new loan amount is less than 80% of your home's value, you won't need PMI.
When Must PMI Be Automatically Removed?
As mentioned earlier, lenders must automatically cancel PMI when your loan balance reaches 78% of the original value of your home. However, there are a few additional points to note:
You need to be up-to-date with your mortgage payments for automatic cancellation to occur.
This rule applies to single-family homes that are your primary residence or a second home.
For other types of properties, like multi-family homes, the rules might be different.
Conclusion
Mortgage insurance is an extra cost that comes with getting a conventional loan if your down payment is less than 20%. While it might seem like a burden, PMI allows many people to buy homes they otherwise couldn't afford. The key is to understand how it works and how to get it removed as soon as possible. By keeping track of your loan balance and home value, you can take steps to cancel PMI and reduce your monthly payments. Remember, PMI is temporary, and with smart financial planning, you can say goodbye to it sooner than you might think.