February 6, 2008
The Key to PMI Removal: Pay Off Mortgage Debt Early
Primary mortgage insurance (PMI) is a pain. If you bought your home without a substantial down payment, you are probably charged for PMI on your mortgage statement every single month. Over the course of the loan, you could waste thousands of dollars on PMI payments.
The best way to get rid of PMI is to pay off mortgage debt early. You don’t need to pay down your entire mortgage at once. But, by making a few extra payments, you could save a lot of money. Paying off mortgage debt early is almost always a smart financial decision for borrowers burdened with mortgage insurance.
What Lenders Don’t Want You to Know About PMI
PMI does not benefit you in any way. Here’s how it works: If you buy a house with a down payment of less than 20%, you are charged for mortgage insurance every month. (Because you did not bring a large down payment to the closing table, you are considered a higher-risk customer). The mortgage insurance is paid to protect the lender in the chance that you default on the home loan. If the lender must foreclose on the property, you will not see your money back. If you faithfully pay your home loan every month, you will not see your money back. Either way, it’s thousands of dollars down the drain.
Unlike home loan principle payments, PMI does not help you pay off your loan. Unlike home loan interest payments, PMI is not always tax deductable. PMI is designed to help the lender – not the borrower.
Fortunately, if you payoff mortgage debt early, you can request that your lender stop charging you PMI.
How Paying Off Mortgage Debt Early Can Help
A 1998 law, called The Homeowner’s Protection Act, requires the lender to cancel your PMI automatically once your loan to value ratio is at 78% or lower (meaning you owe less than 78% of your home’s valued price). Once you reach an 80% loan to value ratio, you may write your lender and request that they remove the mortgage insurance charges. Unless there are extenuating circumstances (such as a poor payment history or a lien on the home), they are required to comply.
If you pay the amount due on your mortgage statement every month, your PMI will be removed eventually. However, it will probably take many years and many thousands of dollars. During the first few years of any home loan, mortgage payments are almost completely interest. You pay very little towards your principle balance, which means it will take a very long time to achieve an 80% loan to value ratio.
By paying off mortgage debt early, you can reach the required ratio much faster. It doesn’t take much to pay off mortgage debt and request a PMI removal. In fact, even small payments here and there can add up.
Using Our Free Mortgage Calculator to Pay Off Mortgage Debt
Our free mortgage calculator can help you determine the best way to pay off mortgage debt early. It’s easy to use and is doesn’t cost a dime. Consider this example:
Shelly purchased a $200,000 home with a $20,000 down payment (10%). Every year, she paid $1248 in PMI. By using the free mortgage calculator, it’s easy to determine that Shelly can reach an 80% loan to value ratio by paying an additional $20,000 towards the principle of the loan.
If Shelly does not pay off mortgage debt early and only makes the minimum monthly payment, she will reach an 80% loan to value ratio after eight years and 95 PMI payments. She will have wasted $9,984 on PMI.
If Shelly pays off mortgage debt early with an additional $278 principle payment every two weeks, she will reach an 80% loan to value ratio after only three years. She will have paid only $3744 on PMI. In addition to saving $6240 on needless PMI charges, she will have paid an extra $20,000 on her home loan – making it possible to pay off her mortgage 6 years and 8 months ahead of schedule.
By paying off mortgage debt early during those three years, she will save an additional $72,042 over the life of the loan (even if she never makes another early payment again!)
PMI Removal Alternatives
If you decide not to payoff mortgage debt early, there are still three ways to remove PMI. You could choose to make the minimum monthly mortgage payment and “wait it out.” It may take years, but eventually you will have paid off enough mortgage debt to reach an 80% loan to value ratio.
Alternatively, you could remodel and reappraise. If your home improves significantly or the values in your neighborhood go up, your home may reach the loan to value ratio sooner than expected.
Finally, you could refinance your mortgage with an 80/20 loan (sometimes called a “piggy back loan”). You would avoid PMI by having two loans, instead of one loan that finances over 80% of the home. The interest rate on the smaller loan will probably be substantially higher than your current loan (but, of course, the amount owed will be much lower).
Helpful PMI Removal Resources
The easiest way to get rid of burdensome PMI charges is to pay off your mortgage debt early. But, whatever you option you choose, our free mortgage pay off calculators can help you figure out how to eliminate this unnecessary cost and help you pay off your home loan in much less time.
Don’t waste thousands of dollars on PMI. Use our amortization calculators to create a realistic mortgage payoff plan today.Comments (0)