The result is that the borrower has to pay for private mortgage insurance (PMI), which usually amounts to between 0.5 and 1 percent of the loan. So if you get a mortgage for $200,000, and your mortgage insurance premium is 1 percent, you’ll pay $2,000 a year for PMI, or about $167 a month.
Paying extra on your mortgage certainly isn’t enjoyable; however, it does allow borrowers who wouldn’t be able to afford a higher down payment the ability to purchase a home. When does it end? You might be wondering. There are two ways you can get rid of private mortgage insurance.
1. Borrower-requested cancellation
Once you’ve attained 20 percent equity in your property, you can ask your lender to cancel PMI on your property; however, they have no obligation to do so. There are many ways to build equity faster, the simplest of which is to pay a little extra every time a mortgage payment is due.
Home improvements, if chosen wisely, are another way to get to that 80 percent loan-to-value level. The reason being that your loan will stay the same, but your home will now have a higher value. The difference between your loan and the new value is equity in your pocket. Just remember that before the lender will eliminate PMI, they’ll require a home appraisal, which costs about $300-$400.
2. Automatic termination
If you can’t afford extra payments, or your lender rejected your cancellation request, never fear, in a few years your private mortgage insurance will automatically terminate.
The Homeowner’s Protection Act (HOPA) makes it illegal for lenders to unnecessarily charge borrowers mortgage insurance. Typically, this means that when your mortgage balance is paid down to 78 percent of the original value, lenders will automatically end private mortgage insurance.
If PMI sounds like a headache, then start saving and make sure your down payment is greater than 20 percent. You might have to wait longer until you make a purchase, but the stress you save yourself could make it worth it.
source: totalmortgage.com
