For many homeowners who opt for a conventional mortgage with less than a 20 percent down payment, Private Mortgage Insurance (PMI) becomes a necessary part of their monthly expenses. PMI is an additional charge on your mortgage payment, primarily designed to protect the lender in case of default. However, there are several ways to eliminate this extra cost, which can save you a significant amount over the life of your mortgage.

When Does PMI Go Away?

The Homeowners Protection Act of 1998 set forth guidelines for the automatic termination of PMI. According to the Act, PMI must be removed by the lender once the borrower attains a 78 percent loan-to-value (LTV) ratio. This means that when you have paid down your mortgage to 78 percent of the original purchase price of your home, PMI should be lifted automatically.

For instance, if you bought a home for $300,000, PMI would be removed when your mortgage principal falls to $234,000. It’s important to note that PMI costs decrease as you pay down your loan, and are completely removed when you reach the required LTV ratio.

How to Get Rid of PMI

While PMI can add hundreds to your monthly mortgage payment, there are several strategies to get rid of it:

1. Wait for Automatic or Final Termination
Under the Homeowners Protection Act, PMI is automatically terminated once your LTV ratio hits 78 percent. Alternatively, PMI must be cancelled at the midpoint of your loan’s amortization schedule, regardless of LTV ratio. This applies if you’ve been making regular payments and are in good standing with your lender.

2. Request PMI Cancellation at 80 Percent Mortgage Balance
You can request to cancel PMI when your mortgage balance reaches 80 percent of your home’s original value. This requires a proactive approach, including a written request to your lender and ensuring you meet other lender-specific requirements.

3. Pay Down Your Mortgage Early
Making larger or additional mortgage payments can expedite reaching 20 percent equity, allowing you to request PMI cancellation sooner.

4. Refinance Your Mortgage
Refinancing might be an option if you’re close to the 20 percent equity mark, especially if you can secure a loan that doesn’t require PMI.

5. Reappraise Your Home
In a thriving real estate market, your home’s value might increase enough to push your equity over the 20 percent mark, qualifying you for PMI cancellation.

6. Home Improvements
Significant improvements to your home might increase its value, potentially raising your equity to the required level for PMI cancellation.

Caution: Don’t Drain Your Assets

While eliminating PMI can be financially beneficial, it’s crucial not to deplete your savings or investment accounts in the process. Maintaining a balance of liquid assets for emergencies is a wise financial strategy.

Know Your Rights Under Federal Law

The Homeowners Protection Act ensures your right to eliminate PMI under specific conditions. Familiarize yourself with these provisions and keep track of your mortgage payments and home value. If you believe your lender is not complying with PMI removal regulations, you can file a complaint with the Consumer Financial Protection Bureau.

Conclusion

Paying off your PMI can be a financially savvy move, saving you thousands over the life of your mortgage. By understanding the rules and keeping a vigilant eye on your mortgage balance and home value, you can take steps to remove this extra charge as soon as you’re eligible. Remember, the responsibility to initiate PMI cancellation often lies with you, the homeowner, so stay informed and proactive in managing your mortgage costs.

Homeowners often overlook the financial potential of their home equity, a valuable asset that can be used to purchase a second home. This equity, calculated as your home’s value minus any outstanding mortgage, can be accessed through two primary methods: a home equity loan or a Home Equity Line of Credit (HELOC). A home equity loan offers a lump sum with a fixed interest rate, ideal for significant one-time expenses. In contrast, a HELOC provides a flexible, revolving line of credit with variable interest rates, akin to a credit card.

Using home equity to buy another home offers several advantages. It enables you to access substantial funds without depleting personal savings and allows you to retain ownership of your current home. Additionally, it can position you as a more competitive buyer, with the ability to make larger down payments or even full cash purchases. However, it also carries risks, such as the potential loss of your primary home if you cannot repay the loan, the burden of additional debt, and the possibility of negative equity in a declining market.

There are tax implications to consider when using home equity for real estate investment. Typically, the interest on home equity loans is tax-deductible when used for improvements on the property securing the loan. However, this deduction may not apply if the loan is used to purchase a separate property, like a vacation home.

For those considering using home equity for an investment property, it’s crucial to weigh the potential for high returns against the risks of financial strain. Investment properties can offer significant income opportunities, but they also pose the risk of underperformance, which can lead to financial challenges if the property doesn’t generate expected income.

Besides home equity loans and HELOCs, other financing options include obtaining a new mortgage on the second property, taking a loan from retirement savings, opting for a personal loan, considering a cash-out refinance, or exploring reverse mortgages (for homeowners over 62). Each option has its unique features and implications so please schedule a consultation on our website and we can review your individual options.

In 2024, new homeowners are seeing mortgage interest rates have more than doubled since 2021, making the dream of home ownership with the traditional down payment of 20% seem like a bridge that is very far.
However, there are many options and programs that don’t require 20% down. Some loan programs now allow for a much lower down payment, requiring as little as 3 percent in cash. This development significantly eases the burden for homebuyers, especially first-timers.
Understanding 3 Percent Down Mortgage Options
These low down payment mortgages are often part of special programs, typically targeting first-time homebuyers or those who haven’t owned a home in the recent past. Here’s a closer look at these options:
1. Conventional 97
• Backed By: Fannie Mae
• Key Features: Only 3% down required; down payment can be a gift, grant, or other assistance.
• Qualifications:
• Must be a first-time homebuyer or not have owned a home in the past three years.
• Homebuyer education course required for all first-time buyers.
• Minimum credit score of 620.
• The home must be a primary residence.
• Conforms to loan limits (e.g., $766,550 for a one-unit property in most areas).
• Additional Info: Requires private mortgage insurance (PMI) until 20% equity is reached.
2. Fannie Mae’s HomeReady Program
• For: A wider range of properties, including multi-family units.
• Qualifications:
• Open to those who haven’t owned a primary residence in the past three years.
• Credit score minimum of 620.
• Income cannot exceed 80% of the area’s median income.
• At least one unit must be the owner’s primary residence.
• Unique Feature: Counts rental income towards income requirements; down payment can be entirely from gifts or assistance.
3. Freddie Mac’s HomePossible Program
• Distinctive Feature: Allows non-occupying co-borrowers to contribute to the down payment.
• Qualifications:
• Homeownership education for first-time buyers.
• Credit score of 660 or above.
• Income limits apply.
• Must live in the home as a primary residence.
• Additional Info: PMI required until 20% equity is achieved.
4. HomeOne by Freddie Mac
• Target Audience: First-time homebuyers and those looking for cash-out refinances.
• Qualifications:
• At least one applicant must be a first-time homebuyer.
• Usable credit score required.
• Property must be a single-unit primary residence.
• No Restrictions: No income or geographical limitations.
Other Low-Down Payment Options
• FHA Loans: Minimum 3.5% down. Available to a broader audience, including those with lower credit scores.
• USDA and VA Loans: No down payment required, specific to rural area borrowers (USDA) and military personnel (VA).
The path to homeownership in 2024, despite the daunting landscape of high interest rates and challenging savings goals, is made smoother with these innovative low down payment mortgage options. Whether you’re a first-time homebuyer or someone looking to re-enter the housing market, these programs offer a ray of hope and an opportunity to achieve the dream of owning a home. Fill out our easy pre-qualifier on our website and we can see what program best fits your needs!