Once you’ve purchased a home and obtained a conventional loan, you’ll be required to pay private mortgage insurance (PMI) until you’ve accumulated a certain amount of equity in the property. The good news is that you don’t have to keep making these payments forever. Here’s what you need to know about how long you have to pay mortgage insurance:
By understanding the rules surrounding PMI payments, you can plan accordingly and take steps to reduce or eliminate this extra expense.
Understanding the Basics: What is Mortgage Insurance?
When someone wants to purchase a home, they usually need to take out a loan. This loan, called a mortgage, is usually a huge financial obligation that can go on for decades. However, not everyone can put down a 20% down payment. As a result, most lenders require mortgage insurance to limit their risk. Mortgage insurance protects the lender if the borrower defaults on the mortgage.
Mortgage insurance is not to be confused with homeowner’s insurance, which protects the borrower in case of damage or loss to the property. Mortgage insurance is usually added to the monthly mortgage payment and is only removed under specific conditions.
When is Mortgage Insurance Required for Conventional Loans?
Mortgage insurance is usually required for conventional loans if a borrower can’t put down at least 20% of the home’s purchase price. In this scenario, a borrower is considered to be high-risk because they don’t have enough equity in the property. Mortgage insurance can be either private mortgage insurance (PMI) or government mortgage insurance (MI).
PMI is required by most conventional loans, while MI is required for government loans such as FHA loans. The amount of mortgage insurance required varies, but it typically ranges from 0.3% to 1.5% of the original loan amount.
When Can You Ask to Cease PMI Payments?
Once you’ve achieved 20% equity in the home, you can ask to cease PMI payments. The process of ceasing PMI payments takes time and may necessitate an appraisal of the house. Homeowners who want to apply to stop paying PMI need to call their lender. The lender will need to see proof that the homeowners can cover their mortgage loan payments without the PMI.
It is important to note that once you’ve reached the 22 percent equity threshold, PMI usually gets removed automatically. Therefore, homeowners who have achieved this milestone do not need to call their lender to have the PMI payments discontinued.
How to Calculate Your Home’s Equity to Remove PMI
To calculate your home’s equity and remove PMI, you need to first calculate your loan-to-value ratio (LTV). The LTV is calculated by dividing the amount of your mortgage loan by the home’s purchase price. Once you’ve calculated your LTV, you can use it to estimate your home’s equity.
For example, if your LTV is 80%, you have 20% equity. At this stage, PMI can be discontinued once a borrower requests it. Homeowners who are unsure of how to proceed can contact their lender or mortgage insurance provider for assistance.
Automatically Removing PMI at 22 Percent Equity
PMI gets automatically removed when a borrower reaches 22% equity in their home. The homeowner does not need to do anything to remove the PMI at this point. This rule applies to most conventional loans.
It is important to note that if a borrower has missed mortgage payments or incurred delinquencies, PMI may not get automatically removed from their mortgage. In such cases, the homeowner may need to reach out to the lender or mortgage insurance provider to get the PMI removed.
Different Types of Loans and Mortgage Insurance Requirements
While mortgage insurance is usually required for conventional loans, there are different types of loans that have their own mortgage insurance requirements. For example, FHA loans have their own mortgage insurance called Mortgage Insurance Premium (MIP). MIP is required for the entire lifespan of the loan if a borrower puts down less than 10% down payment.
VA loans, on the other hand, do not require mortgage insurance. However, they require a funding fee that can go towards maintaining the loan program. Homeowners who are unsure about their mortgage insurance requirements can contact their lender or mortgage insurance provider for assistance.
In conclusion, mortgage insurance is an important aspect of homeownership. PMI can be ceased once you’ve achieved 20% equity, and it can be automatically removed when you’ve reached 22% equity. Different types of loans have different mortgage insurance requirements, and it is important to understand them to make smart financial decisions.