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How long do you have to pay PMI for?

If you take out a conventional or private mortgage loan, you can typically cancel PMI once you’ve met certain requirements in terms of principal and your LTV ratio. Here are some cases where you should be able to cancel your PMI.

Home equity exceeds 22%

It is possible to get out of private mortgage insurance once your LTV reaches 78%. Thanks to the Homeowners Protection Act, as long as you are current on your payments, the lender must cancel the payments at this point. As a general rule of thumb, it could take up to 11 years to reach that LTV, depending on your payment plan. Also, keep in mind that you can request to have your PMI canceled at 20%, but the lender may deny your request if you don’t have a good payment history or have liens on the property.

Home value appreciates

Another exception is if the value of your home increases or appreciates, and your net worth increases by 20% or more. In this case, you may need a current appraisal, a broker’s price opinion, or an automated appraisal model to confirm your home’s value.

Refinancing

Some people refinance their homes to get rid of PMI. However, factor in the cost of refinancing to make sure it’s worth it considering that you have to pay closing costs again. If you’re not careful, you could end up paying more to refinance than to keep paying private mortgage insurance.

Refinance your home loan to stop paying PMI.

When you prepay the principal on your mortgage, you are simply making additional payments on your loan balance each month. Not only does this save you money on interest, it helps you build equity faster. If you can prepay enough principal, you’ll be over 20% of net worth, meaning you no longer have to pay PMI.

Types of PMI

There isn’t just one type of Private Mortgage Insurance PMI, so you have options when it comes to paying for it. Your financial circumstances will determine which one is best for you; some are more profitable than others.

Borrower Paid Mortgage Insurance (BPMI)

This is the most common type of PMI. You pay it in monthly installments until you have 22% equity in your home. The payment can be included in the mortgage payment each month or you can pay it by separate.

Single Premium Mortgage Insurance (SPMI)

If you can afford it, paying PMI in one lump sum is an option; full amount is paid at closing. Another trick is to try to negotiate the cost of SPMI and get the seller to cover some, if not all, of the cost.

Some disadvantages of SPMI are:

  • If you refinance or sell before you reach 20% equity, you could lose money.
  • If you finance to pay SPMI, you must continue to pay interest throughout the life of the mortgage.
  • If you have the money to pay SPMI up front, consider putting that money toward a down payment. If it’s close to the 20% mark, it may be worth it, that way you can forget about paying PMI altogether.

Lender Paid Mortgage Insurance (LPMI)

This is what it looks like, the lender pays the mortgage insurance premium. What’s the trick? You pay a higher interest rate, which means you technically still pay it. For this reason, you can’t pay off LPMI when your loan-to-value ratio reaches 78%, and your interest rate doesn’t go down either.

The only way to get rid of this type of mortgage insurance is to refinance your loan. What is the benefit then? Your monthly payments could still be lower than if you were paying PMI monthly.

Split premium mortgage insurance

It is a mix of BPMI and SPMI. An amount is paid at closing (between 0.50% and 1.25% of the loan amount) and the rest monthly. The advantage of this type of PMI is that you don’t have to contribute the entire lump sum at closing and you don’t end up paying as much in monthly installments.

Aside from the savings benefits, SPMI is good for people with a high debt-to-income ratio. For example, using BPMI could cause a high monthly payment, which could mean you don’t qualify for the mortgage you want. However, with split-premium mortgage insurance, monthly payments are reduced, thereby lowering your debt-to-income ratio.

With this type of PMI, you also want to see if the seller will pay the amount up front, so you only have to pay the balance monthly.

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