Lenders recommend that first-time homebuyers place a 20 percent down payment on their mortgages for several reasons. For one, the 20 percent down payment assures lenders that you can pay off your home loan completely.
Secondly, on your side of things, finance expert altiusmortgage.com notes you can build equity faster on your home. Nonetheless, many homebuyers today opt for down payments less than 20 percent. In turn, lenders require them to pay private mortgage insurance.
What Is PMI?
Private mortgage insurance (PMI) becomes an added cost to your mortgage if you place less than 20 percent down payment. You can expect your monthly mortgage payments to increase because of PMI.
PMI protects the lender in case you default on your mortgage; if you do, the insurance policy will pay off the rest of the loan to your lender.
How Can You Avoid PMI?
Now, PMI may seem like an added worry for you if you place less than 20 percent down payment. You can consider putting 20 down to get a mortgage, no PMI, but 20 percent down payment can be a great deal of cash.
Alternately, you can go with a less than 20 percent down and build up your equity to 20 percent to have PMI canceled.
How Can You Remove PMI?
Fortunately, you can eliminate private mortgage insurance faster through different means. Once you have paid your mortgage for a few years already, and your home’s value has increased within that time, you can refinance to a lower mortgage rate for lower monthly payments.
The refinance will also remove the PMI. You can also pay down your principal little by little. Pay what extra you can pay every month or every year to build up your equity faster.
Alternately, you can also finance a remodel that will increase your home’s market value. A higher home market value can mean lower loan-to-value ratio (LTV). Around 80 percent LTV will be enough to remove PMI.
Private mortgage insurance may now appear less daunting than it first seemed. With the methods above, you can quickly cancel that insurance policy.