Of all the costs associated with mortgages in Arizona, private lenders insurance (PMI) is perhaps the hardest to swallow. It has no benefit to you whatsoever; it’s a charge that you have to pay to protect your lender from you. In case you default on your loan, the insurer would cover any financial loss your lender might incur.
If you can’t produce a 20% down payment when applying for a mortgage in Chandler, you have no choice but to pay for PMI for a certain period. Fortunately, there are means to ditch this insurance ASAP. For starters, here are the four most effective ways to get rid of PMI:
Settle It at Closing
PMI is part of a typical monthly mortgage payment, although it only represents the smallest portion of the bill. However, you can have the option to pay for it up front. Your lender could also cover it for you at closing, but you might pay higher interest in the exchange.
Paying your entire PMI premium early on is beneficial to drive your regular mortgage payment down. If you have enough money to settle it but not enough to put down 20% of the property price, this practice might be advantageous for you.
Put Down More Money
The law dictates that PMI should be automatically terminated when a mortgage borrower gains 22% equity in the property. In other words, one’s loan-to-value (LTV) ratio must be down to 78% for this rule of the Homeowners Protection Act of 1998 to kick in.
Although every borrower eventually reaches this LTV point, it can take a lot of time because most of the early monthly payments go to the interest instead of the principal. You could be stuck paying PMI for the majority of your loan’s first half.
To accelerate your progress toward magic number 78, borrow less money. If your cash is small enough to cover one-fifth of the property value or pay the PMI premium up front, add it to your down payment to get a head start in principal balance reduction.
Monitor Home Equity
The law also allows you to request for early PMI cancellation provided that you have 20% equity in your property. This is something that you need to do proactively because a lender wouldn’t call you about it and would rather wait for you to reach 22%.
To build equity in your property faster, make extra payments to reduce your mortgage balance more quickly. You can also invest in capital improvements, which are home renovations that inevitably increase property value. Also, you can do nothing and let land appreciation decrease your LTV ratio passively. To produce evidence that you have at least 22% equity in your property, though, get a new appraisal while complying with your lender’s rules.
Refinance Your Loan
Dumping PMI shouldn’t be the primary goal of refinancing a current loan; getting a lower mortgage rate should. However, the chance to get rid of this insurance and save on interest at the same time can serve as extra motivation.
However, a refi would reset the clock of your mortgage. Also, refinancing comes with closing costs, which should be less than your projected savings on PMI and interest to make this practice worth the effort.
Not every method of ditching PMI would work for everyone, but the abundance of cancellation options is enough to strategize your moves. Have a solid plan to dump this expense right at the beginning to obtain the mortgage you need and save money in the long run.