Introduction
If you’ve recently purchased a home and put down less than 20% of the purchase price, you are likely paying for private mortgage insurance (PMI). PMI is a type of insurance that protects lenders in case the borrower defaults on their loan. For many homeowners, PMI can be a frustrating expense, adding hundreds of dollars to their mortgage payment each month. However, with some strategic planning and effort, it is possible to get rid of PMI and save some money.
How to Get Rid of PMI
A. Make Extra Payments
One way to get rid of PMI is to increase the amount of money you pay toward your mortgage each month. By doing so, you can reach the 20% equity threshold faster and request that your lender remove PMI from your mortgage payment.
Here are some tips for finding extra money to put toward your mortgage:
- Create a budget and look for ways to reduce expenses
- Take on a side job or gig to make extra income
- Make a lump sum payment whenever possible, such as with a work bonus or tax return
It’s important to note that PMI payments are based on your loan balance, so extra payments have a compounding effect on the amount of equity you can build. To calculate approximately how much extra you would need to pay each month to reach 20% equity, divide your current loan balance by 80% (or 0.8). For example, if your loan balance is $200,000, divide it by 0.8 to get $250,000, which would be your target equity amount.
B. Refinance
If you don’t have the extra money to put toward your mortgage each month, another option is to refinance your mortgage. By refinancing, you may be able to take advantage of lower interest rates and get rid of PMI at the same time.
Before you decide to refinance, it’s important to consider the pros and cons:
- Pros: Lower interest rates, lower monthly payments, and a chance to get rid of PMI
- Cons: Closing costs and fees can be expensive, and you may have to pay for an appraisal
To calculate whether refinancing is a good option for you, consider the following:
- The cost of refinancing, including closing costs and fees
- The potential savings on your monthly mortgage payment and PMI
- The length of time you plan to stay in your home
- Your credit score and debt-to-income ratio
C. Request an Appraisal
If you think your home has increased in value since you purchased it, you can request an appraisal from a certified appraiser. If the appraisal shows that your home has increased in value enough to reach the 20% equity threshold, you can request that your lender remove PMI.
Before you decide to request an appraisal, consider the pros and cons:
- Pros: May be the fastest and easiest way to get rid of PMI
- Cons: Appraisals can be expensive, and there is no guarantee that your home has increased in value enough to reach the 20% equity threshold
To calculate if your home has increased in value enough to get rid of PMI, divide your current loan balance by the appraised value of your home. If the result is less than 0.8, or 80%, you have reached 20% equity in your home.
Comparing Strategies
To help you decide which strategy may be best for you, here is a comparison of each method:
| Method | Pros | Cons |
|---|---|---|
| Make extra payments | May take less time to reach 20% equity, no need to refinance, and may increase your credit score | May not be feasible for everyone, does not guarantee an increase in equity, and may require discipline and sacrifice |
| Refinance | May result in a lower interest rate, lower monthly payment, and can get rid of PMI | May be expensive, requires a new appraisal, and may result in a longer loan term |
| Request an appraisal | May be the fastest and easiest way to get rid of PMI, and may result in an increase in equity | May be expensive, there is no guarantee of reaching the 20% equity threshold |
It’s important to remember that everyone’s situation is different, and there is no one-size-fits-all approach. To make the best decision for your situation, it’s important to weigh all the pros and cons of each approach, and consider your financial goals and constraints.
Real-Life Success Story
One success story is Mark, who was able to get rid of PMI by making extra payments on his mortgage. Mark’s goal was to reach 20% equity in his home as quickly as possible, and he was able to do so by increasing his monthly mortgage payment by $200. By doing this, he was able to reach the 20% equity threshold a year earlier than expected, saving him over $3,500 in PMI payments.
“It’s easy to get bogged down by the extra expenses of homeownership,” Mark says. “But by making a few small changes and prioritizing paying down my mortgage, I was able to save a significant amount of money over the long run.”
To get additional perspective, we asked mortgage lender Sarah for her input on Mark’s success story.
“Making extra payments on your mortgage can be a smart strategy for getting rid of PMI,” Sarah says. “Not only does it help you reach the 20% equity threshold faster, but it can also have a positive impact on your credit score, which can help you in the long run.”
Extra Tips and Tricks
To help you reach your goal of getting rid of PMI, here are some additional tips and tricks:
- Look for ways to reduce expenses, such as cutting back on eating out or canceling unused subscriptions
- Take on a part-time job or side hustle to make extra income
- Consider a bi-weekly payment plan, where you pay half of your mortgage payment every two weeks. This can result in making an extra full payment each year, which can help build equity faster
Commonly Asked Questions
Here are some answers to common questions people have about getting rid of PMI:
How do I know if I’m paying PMI?
If you put down less than 20% of the purchase price of your home, you are likely paying PMI. You can check your mortgage statement to see if there is a line item for “mortgage insurance”.
Can I get rid of PMI if I have an FHA loan?
If you have an FHA loan, you are required to pay PMI for the life of the loan. However, if you put down at least 10% of the purchase price, you may be able to get rid of PMI after 11 years.
Conclusion
Getting rid of PMI can save you significant money over the long run, but it does require effort and strategic planning. By making extra payments, refinancing, or requesting an appraisal, you can reach the 20% equity threshold and get rid of PMI. Just remember to weigh all the pros and cons of each approach, and consider your financial goals and constraints.