While it’s not a bad idea to save as much as you can for a down payment, other goals and the urgency of the situation mean this isn’t feasible for many buyers. But if you’re getting a conventional loan, you can get into a home with as little as 3% down. You just have to pay private mortgage insurance (PMI). But no one likes to pay extra fees longer than they have to, so we’ll go over when and how to get rid of it.
The requirements for removing PMI can vary when dealing with a multiunit or investment property. We’ll talk briefly about how that works in a special section later on, but understand that the majority of this article will deal with PMI on single-unit and vacation homes.
Private mortgage insurance, or PMI, provides a payment for part of the outstanding loan amount if a borrower defaults on their loan. While lenders get some peace of mind for taking on additional risk, it also benefits those looking to buy or refinance a home because they can get mortgages with down payments or existing equity lower than 20%. But you can also typically request its removal once you reach 20% equity.
Can You Pay a Lump Sum to Get Rid of PMI? A Guide for Homeowners
If you bought a home with less than 20% down, chances are you’re familiar with PMI – private mortgage insurance. This added insurance protects the lender in case you default on your mortgage. But that extra monthly PMI payment can really add up, leaving homeowners asking – can I pay a lump sum to get rid of PMI?
The short answer is yes, you can pay a lump sum to cancel your PMI. By making a one-time extra payment that reduces your loan-to-value ratio (LTV) to 80% or below, you can trigger automatic PMI removal. This eliminates the monthly premiums and puts more cash back in your pocket each month.
But before you rush to write that big check let’s break down exactly how paying a lump sum to cancel PMI works when it makes sense, and other options for ditching PMI for good.
How Does Paying a Lump Sum to Cancel PMI Work?
When you make a lump sum payment on your mortgage loan, that money goes directly to paying down the principal balance. As you owe less principal, your loan-to-value ratio improves.
LTV compares how much you currently owe on your mortgage to the home’s original or current value. Once your LTV hits 78-80%, you’ve built up enough equity to qualify for PMI removal.
For example:
- You purchased a $300,000 home with 10% down ($30,000)
- Your original mortgage amount was $270,000
- After 5 years of payments, you owe $245,000
- Your current LTV is 82% ($245,000 divided by $300,000)
If you make a $10,000 lump sum payment, your balance drops to $235,000. Now your LTV is 78% and you can request PMI cancellation.
The exact LTV requirements depend on your mortgage specifics, but typically 78-80% is the magic number. Check with your lender to confirm requirements.
When Does a Lump Sum Payment to Remove PMI Make Sense?
Paying a lump sum is one of the fastest ways to remove PMI from your mortgage. But just because you can doesn’t necessarily mean you should.
Here are a few key factors to consider:
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Your financial situation – Do you have cash on hand for a lump sum, or will you need to tap savings/emergency funds? Don’t sacrifice your financial safety net just to remove PMI.
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Mortgage details – Review your amortization schedule and determine when you’ll hit 78-80% LTV through regular payments. If it’s soon, a lump sum may not be necessary.
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PMI costs – Calculate your annual and monthly PMI payments. If they are minimal, the savings from removing PMI may not outweigh the lump sum cost.
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Interest rate environment – If rates are low and you can refinance into a better loan with no PMI, that may be the better route.
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Long-term plans – How long do you plan to stay in the home? If you’ll move soon, a lump sum payment may not pay off.
Weigh all these factors carefully before deciding if a lump sum PMI removal makes sense for your situation. Consulting a financial advisor can provide an objective outlook.
Other Ways to Cancel PMI
While a lump sum payment is the express lane, there are a few other routes to ditching PMI for good:
Reach 20% Equity
This is the most common path to PMI removal. Once your loan balance drops below 80% of the home’s original value, PMI cancellation is automatic. You can check your amortization schedule to see when you’ll hit this point through regular payments.
Request Cancellation at 78%
Most lenders are required to remove PMI once you hit 78% LTV if requested. You’ll need to submit a written request and may need an appraisal.
Refinance Your Mortgage
When rates drop, refinancing makes sense for many homeowners. Opting for a new loan without PMI can rid you of the monthly premiums.
Home Reappraisal
If your home value has increased, a new appraisal showing you have 20% equity based on the current value can cancel PMI.
Home Improvements
Major renovations and additions can boost your home value. If the work pushes you over 20% equity, PMI can be removed.
Paying PMI each month isn’t fun, but there are options to remove it. Before making any lump sum payments, scrutinize your finances and mortgage details to choose the best path forward. With proper planning, you can say goodbye to PMI for good.
How much does PMI cost?
Although there are exceptions, PMI generally costs in the range of 0.1% – 2% of your loan amount per year. That’s a wide range, so here are two main factors involved in determining your premiums:
- Down payment: Your down payment not only impacts whether you have PMI, but how much you can expect your premiums to be. The higher your down payment, the lower your PMI.
- Credit score: Your credit score is another risk factor that impacts both your loan qualification and how much you pay for mortgage insurance. The higher your score, the less you can expect to pay.
Other risk factors accounted for include your debt-to-income ratio, the property type and how the home is occupied.
How to speed up the process
You can usually make extra payments toward your principal balance to meet the requirements to remove PMI faster. You can check with your lender to see if this is allowed on your loan.
Can I Pay a Lump Sum on My Mortgage?
FAQ
Can you pay down mortgage to remove PMI?
If Your Mortgage is From a Federally Chartered Lender
Federal law requires lenders to cancel PMI, upon request, when the homeowner has made payments that reduce the principal amount owed under the mortgage to 80 percent of the home’s value at the time it was purchased.
What is the 2 year rule for PMI?
For loans that are between two and five years old, the PMI can be removed using the home’s current market value when the loan-to-value (LTV) is 75% or less. There is an exception to this 75% LTV guideline. Mortgage insurance may be removed when substantial improvements have been made and the loan is 2 to 5 years old.
Can PMI be removed if home value increases?
Can PMI Be Removed if Your Home’s Value Increases? Yes, you may be able to have PMI removed if your home’s value increases. But it ultimately depends on whether your home’s LTV is now below 80%.
What is the 78% rule for PMI?
According to the amortization schedule, termination of the PMI would occur when the principle balance of the mortgage, irrespective of the outstanding …Dec 9, 2024