If you bought your home with less than a 20% down payment, your lender is required to have you buy Private Mortgage Insurance (PMI). This product is strictly a risk-management product and only protects the lender if you default on your house payments. PMI is expensive, the amount will vary depending on the buyer's credit score and the size of the down payment. It usually ranges from .3% to 1.5% of the original loan amount per year. You the buyer pay the premiums, and depending on what Congress decides for that specific year, the premium payments may be deductible on your taxes. Most PMI companies make you pay monthly, however there are options to pay the PMI in one lump sum.
To see how Private Mortgage Insurance affects your monthly mortgage payment, consider the following example:
You are looking to buy a home. You currently have a credit score of 740. You find a home you love which costs $250,000. You only have $10,000 for a down payment, which is only 4% of the sales price. This leaves you with a loan-to-value of 96%. The terms of the loan is for 3.7% for 30 years. This means you will add an additional $230 a month for your PMI insurance since your down payment was less than 20%. You could cut your monthly mortgage payment by $230/month by simply getting rid of PMI. So how do you it?
It Can Be Cancelled
Once your outstanding loan balance drops to 78% of the home's original value, your lender must automatically cancel your PMI. But what happens if you want to cancel it sooner? One of the things I would suggest is to keep a close eye on your mortgage payments. Once your loan balance reaches 80% of the home's original value, you can call your lender and ask them to cancel it for you. You should always be ready to negotiate. One of the things to have in your corner is a new home appraisal. There are some lenders who will consider the new appraisal value rather than the original sales price or the appraised value when you originally bought the home. If your house is approved for more than what it was when you bought the home, you might meet the 20% equity threshold. Using the example above, assume your house was appraised today for $290,000. You would own the $10,000 you put down, plus the $40,000 it increased. This will put you at 20% equity. A home appraisal usually costs $250-$500. This may seem like a lot, but if you are paying $230 a month for PMI, this will easily pay for itself.
Make Extra Payments On Your Loan
Even an extra $50 a month can substantially reduce the term of your loan and cause a serious drop in your loan balance over time. This is the easiest, but slowest way to get rid of your PMI. Remember, you only have to reach 20% equity. The amount of time this will take really depends on how much you put down on the house. If you didn't put anything down, then this could several years. It's important you know your rights when you buy a home. Federal law requires the mortgage lender to let know you at closing how long it will take for you to reach the 20% equity threshold. This calculation assumes you will make regular monthly payments. So if you are unsure how long it will take for you to cancel your PMI, I suggest digging out your closing paperwork to check. From here, you can recalculate how long it will take you considering the extra payments every month.
Add Value To Your Home
By doing some remodeling in your home, you can increase your home's market value. Adding a room or finishing a basem*nt could significantly improve the value of your home, which in turn will allow you to cancel your PMI. I do not recommend going out and spending a fortune on a remodel just to cancel your PMI. If this is something you have already planned or saved for, then I would suggest this route. If you have completed a remodel on your home and have not appraised your home since the remodel, I would suggest doing this. You have already spent the money to improve your home, spending a bit more for an appraisal might be worth it.
Cancelling your PMI could significantly improve your financial future. This will allow you to put more towards retirement, save for your child's future, or even save for a family vacation. If you are in the process of looking for a new home, I would suggest trying to save enoughfor a 20% down payment. This will saveyou in the long run.I always look for ways to save money – to add more income to my budget, and this is one of the ways. It's not something you think of right away when you are searching for more income, but it's something that can definitely save you a ton! If you are maxed out on your budget, don't forget to look into your PMI!
Have you cancelled your PMI? What was the experience like? Leave me comments below!
FAQs
You may be able to lower your mortgage payment by refinancing to a lower interest rate, eliminating your mortgage insurance, lengthening your loan term, shopping around for a better homeowners insurance rate or appealing your property taxes.
What happens if I pay an extra $2000 a month on my mortgage? ›
When you pay extra on a mortgage, you're paying above and beyond the regular monthly installment. The money you send is meant to apply directly to the loan principal, not the interest. This allows you to pay down your loan sooner and save money on interest.
How to pay off a 100k mortgage in 5 years? ›
Increasing your monthly payments, making bi-weekly payments, and making extra principal payments can help accelerate mortgage payoff. Cutting expenses, increasing income, and using windfalls to make lump sum payments can help pay off the mortgage faster.
How can I lower my mortgage payment without refinancing? ›
How to lower your mortgage payment without refinancing
- Recast your mortgage. ...
- Cancel your mortgage insurance. ...
- Lower your homeowners insurance or property taxes. ...
- Consider a bi-weekly mortgage payment plan. ...
- Ask your lender for a loan modification. ...
- Pay off your loan.
What options might be available?
- Refinance.
- Get a loan modification.
- Work out a repayment plan.
- Get forbearance.
- Short-sell your home.
- Give your home back to your lender through a “deed-in-lieu of foreclosure”
Not only is California the state with the second-highest average rent payment, but it also boasts the highest average monthly mortgage payment, according to doxo's report. The average monthly mortgage in the West Coast state is $2,576, which is $1,174 above the national average.
Is it better to pay half your mortgage twice a month? ›
A biweekly mortgage payment schedule can save you time and money. You'll pay your loan off faster and save on principal – perhaps hundreds of thousands of dollars. All you have to do is find room in your budget for the equivalent of one extra monthly payment each year.
What happens if I pay $500 extra a month on my mortgage? ›
Making extra payments of $500/month could save you $60,798 in interest over the life of the loan. You could own your house 13 years sooner than under your current payment.
Does paying twice a month reduce interest? ›
No, making biweekly or twice-monthly payments will not change your loan's interest rate. But by making more frequent payments, you can reduce how quickly interest accrues, which helps you lower the total interest paid over the life of the loan.
What happens if I pay 3 extra mortgage payments a year? ›
Making additional principal payments will shorten the length of your mortgage term and allow you to build equity faster. Because your balance is being paid down faster, you'll have fewer total payments to make, in-turn leading to more savings.
Just making two extra mortgage payments a year can shave years off the life of the loan and save you tens of thousands of dollars; here's one strategy to get started.
How to cut 10 years off a 30 year mortgage? ›
Options to pay off your mortgage faster include:
Pay extra each month. Bi-weekly payments instead of monthly payments. Making one additional monthly payment each year. Refinance with a shorter-term mortgage.
Can I reduce my monthly loan payments? ›
First, you can contact your loan provider and ask whether you can bring down the payments. Lenders may be able to provide support, such as a payment holiday or a period of reduced payments or reduced interest, or a repayment plan.
Is it better to put 20 down or pay PMI? ›
If you can easily afford it, you should probably put 20% down on a house. You'll avoid paying for private mortgage insurance, and you'll have a lower loan amount and smaller monthly payments to worry about. You could save a lot of money in the long run.
Which is not a good reason to refinance your mortgage? ›
Key Takeaways
Don't refinance if you have a long break-even period—the number of months to reach the point when you start saving. Refinancing to lower your monthly payment is great unless you're spending more money in the long-run.
Can your monthly mortgage payment decrease? ›
As time goes by and your loan balance decreases, you'll owe less interest every month. So most of your payment will then go toward the principal, even though your total payment stays the same. All that said, your mortgage payments may change slightly because of alterations in your insurance or tax rates.
Can I change my mortgage payment amount? ›
If you increase your payments by more than your prepayment privilege allows, you may have to pay a penalty. Normally, once you increase your payments, you can't lower them until the end of the term. The term is the time that your mortgage contract is in effect including your interest rate and other conditions.
Can you overpay mortgage to reduce monthly payments? ›
Overpayments do one of two things to your mortgage balance, depending on the amount. These reduce your monthly payment. That means we recalculate your monthly payment but your term stays the same. These overpayments help you pay off your mortgage sooner but your monthly payment stays the same.
