How can one eliminate PMI?

For individuals who have purchased a home with a down payment of less than 20%, Private Mortgage Insurance (PMI) is likely to have been added by the lender, contributing to an increase in their monthly mortgage payment. Before delving into how to eliminate PMI, it’s essential to understand what PMI entails.

What is PMI?

PMI serves as insurance that safeguards the lender in the event the borrower defaults on their loan. It’s important to note that PMI does not provide any coverage to the buyer and should not be confused with mortgage protection insurance, which is designed to pay off the mortgage in the unfortunate event of the borrower’s passing before loan completion.

PMI enables borrowers with smaller down payments to secure a loan, as the risk associated with smaller down payments is higher for lenders. The lender mitigates this risk by implementing private mortgage insurance.

Cost of PMI

To illustrate, consider a $1,000,000 home purchase with a buyer possessing a FICO score of 740 or higher. With a 10% down payment, the additional PMI premium is approximately $225 per month. However, if the down payment is reduced to 5%, the premium jumps to around $332 per month.

How to Eliminate PMI

Equity, defined as the difference between the home’s value and the outstanding mortgage amount, plays a crucial role in eliminating PMI. Homeowners should contact their Realtor to ascertain the current market value of their property. Many homeowners who made purchases in recent years have witnessed substantial price appreciation, leading to an increase in their equity.

Once a borrower reaches 20% equity in their home, they should reach out to their lender. The lender may require the borrower to pay for a professional appraiser to assess the current value of the home before considering the removal of PMI. If an appraisal is necessary, the Realtor can assist by providing comparable properties (comps) – recently sold homes in the neighborhood with similar characteristics such as condition, features, square footage, and lot size.

Upon confirmation by the appraiser that the homeowner has achieved 20% or more equity, the lender should proceed to remove the PMI coverage.