We all want to be free from debt. The problem is that debts tend to pile up, even if we are not really aware of their existence. You may be rather surprised at how much money those invisible debts could cost you. Even if you try to live a very thrifty and debt-free life, you may still end up with a snowball of debt. One of these debts that may just go right under your nose is Private Mortgage Insurance (PMI) debt.
What is PMI Debt?
PMI debts are arrears you may incur from buying a new house. Real estate rates can get very steep, and most houses are way out of reach for the budget of most potential homeowners. Even if they don’t have enough money for a reasonable down payment, some people who buy a new house think that loans, financial plans, and mortgage rates can take care of their home financing needs.
If you pay a down payment for your new house that is less than 20 percent of the seller’s asking price, then you pay a PMI. PMI is not technically a debt, but an insurance policy that protects the mortgagor from any losses that he or she may incur should you be unable to pay for the house in full. If you default on your loan, PMI offsets any losses the lender may incur. PMI has helped many Americans become homeowners because it offsets the costs of a 20 percent down payment.
Here’s an example of how PMI works: for a $100,000 loan, you can only afford to pay $10,000 as an initial down payment. This is 10 percent of the amount. You need to reach the 20% equity, so you end up paying a PMI rate of $40 a month. Forty dollars may not sound much, but multiply that by 12 months in a year and you end up paying $480 a year. You can save yourself literally thousands of dollars if you eliminate PMI debt.
Why You Should Get Rid of PMI
Think of PMI as a one-sided loan. While you can buy a house for less than the usual 20% down payment, PMI only protects the lender. You do not get any long-term benefits from PMI, although you get the disadvantage of paying it forever.
While monthly PMI charges look low and affordable, they can pile up and cause an unnecessary strain on your finances. Some people who buy houses on a PMI loan end up paying it off for the rest of their lives. One thing that you should remember about PMI loans is that as long as you keep paying PMI, your house will not be fully paid for. To fully take control of your finances, you need to get rid of PMI as soon as possible.
Pay in Full
The best way to avoid PMI is to not get one at all. If you cannot afford the usual 20 percent down payment for a new house, you are better off saving more money to cover, or even exceed, the down payment, than to end up paying PMI premiums for the next 15 or 20 years. You may need to get extra income or investments to cover the cost of the down payment, but it beats the alternative of PMI.
PMI is a High-Priority Debt
Some people make the mistake of considering PMI to be a low-priority debt. If you pay PMI, it should definitely be a priority debt. You may need to adjust your finances in such a way that a significant portion of your savings help to pay off the PMI. While this doesn’t mean you have to make unnecessary cuts in your budget just to pay for PMI, you and your family may need to tighten your belts for at least a year. Cross-country vacations and expensive holidays may need to take a back seat until such time that your finances are stable enough to pay for PMI.
Talk to Reputable Lenders
PMI costs very little for the lender. Some dishonest lenders may opt not to cancel your PMI, and may prolong your financial agonies. Only reputable lenders and home financing companies offer options to cancel your PMI. Terms for PMI cancellation should be clearly indicated on the loan form and other documents. You may need to consult with your lawyer or your accountant regarding some vague terms and clauses stated on these documents.
How to Cancel PMI Debt
Rules for PMI cancellation are not universal, and will vary depending on the lending company’s cancellation policies. The United States government has a federal law entitled the “Homeowners’ Protection Act,” which establishes generic rules regarding the cancellation of PMI for people who bought their houses on PMI after July 29, 1999. The law states that you can have your PMI canceled if you have paid your mortgage down to 80% of the loan. The law also states that if you have paid 78% of your mortgage loan, the lender must automatically cancel your PMI.
Here are a few easy steps to have your PMI canceled:
- Ask your lender about cancellation procedures for PMI.
- Lenders will require an appraisal to check if your equity and your house value has reached above 20%. If you can afford it, you may need to pay for two appraisal services. The first one would be an appraisal service recommended by the lender, and the other would be an appraisal service you yourself would choose.
- You need to calculate your Loan-to-Value (LTV) ratio, which is a percentage value used to determine if the lender should cancel your PMI. The LTV ratio is the quotient that results when you divide your loan value by your home’s value. If you have a loan of $200,000 and your home was valued by the appraiser at $250,000, you would have an LTV ratio of .8, or 80%.
- Most lenders have to cancel a PMI if you reach an 80% LTV ratio, which translates to a 20% equity. If you have satisfied the 80% LTV ratio, or the 78% ratio stipulated in the Homeowners’ Protection Act, the lender will cancel your PMI.
Some lenders will not cancel your PMI, even if you satisfy the requirements for cancellation. Small claims court can be very expensive and time-consuming, and the least you want to do is to end up on a long-drawn court battle that costs more than the gross sum of the PMI debt. Lenders may also take a lot of time to review PMI cancellation claims. What you need to do is to write polite but firm letters, sent either through conventional mail or e-mail, to the lending company, requesting immediate action.
If the lender refuses to cancel your PMI even if you have satisfied all the requirements, you may need to take them to court. You may need to consult with your lawyer regarding your case and what other steps are needed for your PMI to be cancelled.
Debt causes everyone stress and pain, especially ones that seem impossible to pay off. Getting rid of your PMI debt is a good step to take towards a financially-secure, debt-free lifestyle. There’s also the added benefit of owning your house for real, without the possibility of losing it from a bad debt.
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