Private Mortgage Insurance (PMI) is typically required when you purchase a home with less than a 20% down payment. PMI protects the lender in case the borrower defaults on the loan. To eliminate PMI through a refinance, you have a few options:
- Achieve 20% Equity in Your Home:
- The most straightforward way to eliminate PMI is to wait until you have at least 20% equity in your home, either through your monthly mortgage payments or appreciation in your home's value. At that point, you can request your lender to remove PMI.
- Refinance to a Conventional Loan:
- If your original loan was an FHA or VA loan, you may be able to refinance into a conventional mortgage once you reach 20% equity. Conventional loans typically do not require PMI if you have a 20% down payment or 20% equity. However, this option may not be cost-effective if you're in a high-interest rate FHA or VA loan.
- Request PMI Cancellation:
- You can contact your current lender when you have reached 20% equity and request PMI cancellation. Your lender is required by law to automatically terminate PMI when your mortgage balance reaches 78% of the original home value. However, you can request PMI cancellation once you reach 80% of the original value. Some lenders may have their specific requirements.
- Refinance with a Higher Appraisal:
- If you believe your home's value has increased significantly since you bought it, you can refinance with a new appraisal. If the appraisal confirms that your loan balance is below 80% of the current home value, you may qualify to eliminate PMI.
- Make Extra Payments:
- You can accelerate the process of reaching 20% equity by making extra mortgage payments. Additional payments toward the principal balance can help you eliminate PMI more quickly.
- Reamortize Your Loan:
- Some lenders offer reamortization or recasting options. In this process, you make a lump-sum payment toward the principal balance. After the lump-sum payment, your lender recalculates your monthly mortgage payments based on the new, lower principal balance. This can help you reach the 20% equity threshold more quickly and reduce PMI payments.
- Consider a Lender-Paid PMI Option:
- Some lenders offer loans with lender-paid PMI, where they pay the PMI premium in exchange for a slightly higher interest rate. This can be a useful option if you want to avoid upfront PMI costs, but be sure to compare the overall costs over the life of the loan.
When considering how to eliminate PMI through a refinance, it's important to calculate the costs and benefits to determine the most cost-effective approach for your specific situation. Consult with your lender, and possibly a financial advisor or mortgage professional, to assess your options and determine the best course of action.