In Connecticut, like the rest of America, private mortgage insurance (PMI) is a punishment for borrowing more than 80% of a property’s selling price. Since the more you loan makes you a riskier borrower (regardless of your creditworthiness), this insurance protects your lender from potential financial loss if you turn delinquent.
There is no avoiding PMI if you do not agree to pay a 20% down payment when applying for a home loan in Guilford, but there are ways to ditch it ahead of schedule. Below are the most effective strategies you should consider.
Make In-between Payments
Reducing your principal balance allows you to meet the 80% loan-to-value (LTV) threshold more quickly. The problem is that most of your early payments will be used to decrease interest. The principal of your loan only goes down significantly in the latter part of your mortgage term.
Prepayment is key. If you have this option without getting penalized, pay more significant mortgage monthly payments whenever you can. The surplus should go toward the principal. You can even make extra payments between deadlines if you have disposable money.
However, do not assume that your extra payments will go where they should. Keep track of them to make sure your principal shrinks accordingly.
Get Your House Re-appraised
Some lenders agree to cancel PMI when the property’s value increases over time. Other than trimming your loan’s principal, you can build home equity through land appreciation and home improvement. If you live in a hot real estate market and tackle renovations since you bought your house, your property can increase its value faster than your mortgage’s principal reduction.
Your lender, though, will not merely remove the PMI on your request without any proof. Hire an appraiser to estimate the value of your property beforehand. An appraiser’s fee range about $300 to $500, so it is worth the trouble.
But then again, time is a factor. If you wish to cancel your PMI based on your house’s updated value, the LTV threshold usually becomes 75% if you have owned the property for at least 24 months. If you have owned the property for at least 60 months, then the LTV threshold becomes the typical 80%.
Do Not Borrow Against Your House Again
Apart from showing proof of value, you can’t ask your lender to remove the PMI early if you have other liens on the property. In other words, it should only be used as security for your current mortgage. If you use it as collateral for other debts, like a home equity loan, your request will likely be rejected.
Refinance Your Mortgage
When all else fails, applying for a refi can help you finally dump PMI. The size of your new loan will be based on the current value of your property, so you will not have to pay for this insurance if your LTV ratio is less 80%.
PMI can be a burden, but it is not an unbreakable curse. If you play your cards right, you can get rid of it fast and reduce your monthly mortgage payment successfully.