When you buy a home, one of the most important financial decisions is whether or not to get rid of private mortgage insurance (PMI). PMI is an extra insurance fee that lenders require on conventional loans with less than 20% down. The fee helps cover the lender’s risk if you default on your mortgage, which is why it’s so popular among home buyers.
However, the expense can add up over time and become a significant portion of your monthly payments. You’ll want to think carefully before trying to get rid of PMI, especially if you’re unsure about your credit score or have had any problems with paying off other debt.
The answer depends on your personal circumstances, but there are a few ways that you may be able to get rid of PMI without refinancing. The most obvious way is to reach a certain percentage of equity in your home, which can be achieved by making on-time payments or investing in renovations that raise the market value of your property.
Refinancing is another way to eliminate PMI, but it comes with some risks. First, it requires a new appraisal to confirm the home’s value before closing. That can cost several hundred dollars, but it can also be a worthwhile investment in the long run when you’ll save money on your monthly mortgage payments because you no longer need to pay PMI.
This strategy works well if the value of your home has increased over the years, and it can help you reach the 20% equity mark more quickly than you would otherwise. It can also work in areas where homes are being sold at higher prices, so it’s worth a shot to check the market in your neighborhood to see if it makes sense to refinance.
If you’re considering a refinance, your Better Mortgage Home Advisor will order an appraisal to verify the value of your home. This will also help your loan officer determine whether your mortgage balance will fall below 80% of the current value, which can allow you to avoid PMI on your next loan.
You can only request this in a few situations, but it is often a good idea to look into the possibility of removing PMI if you are planning to stay in your home for a while. Depending on the loan terms, PMI should be removed if your loan balance drops to 78% of the original home’s value or when you make on-time payments for half of the term of the mortgage — on a 30-year mortgage, this means 15 years.
Generally speaking, it isn’t worth refinancing to remove PMI unless you can secure a lower interest rate and a repayment schedule that will leave you with more money in your pocket. A refinance can be expensive, though it can be a good choice for homeowners who have the money to pay for it and who are confident in their ability to repay the new loan.