Orlando Harmon
Private mortgage insurance (PMI) is a policy that mortgage lenders often require when homebuyers provide a down payment of less than 20% of the home's purchase price. It protects the lender in case the buyer defaults on the loan. While it enables many first-time homebuyers to achieve their dreams of owning a home, it can add significant costs to monthly mortgage payments. There are several ways to get rid of PMI, including waiting for automatic termination, requesting cancellation, paying off the mortgage early, refinancing, or getting a reappraisal.
| Characteristics | Values |
|---|---|
| Removal of Private Mortgage Insurance (PMI) | Request cancellation when the loan-to-value (LTV) ratio reaches 80% or lower |
| Automatic cancellation when LTV reaches 78% or at the midpoint of the loan term | |
| Refinancing, reappraisal, or paying down the mortgage faster | |
| Mortgage Insurance Premium (MIP) | Associated with FHA loans |
| Required for the life of the loan if the down payment is less than 10% | |
| Discontinued after 11 years if the down payment is 10% or more | |
| May require substantial equity in the home |
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What You'll Learn
Request PMI cancellation
Private Mortgage Insurance (PMI) is a policy you must buy to protect your lender in case you default on your mortgage. You can expect to pay 0.5% to 1% of your total loan amount per year in mortgage insurance. You can take steps to get rid of PMI sooner, which will leave you with more money in your pocket.
You can request that the lender cancel PMI when your mortgage balance hits 80% of the home's purchase price. You can make this request in writing, and you should be current on your mortgage payments with a good payment history. You should also confirm there are no other liens on your home.
You can also request to cancel PMI ahead of the scheduled date if you have made additional payments that reduce the principal balance of your mortgage to 80% of the original value of your home. You can provide evidence of this, such as an appraisal, that the value of your property hasn't declined below the original value.
You can also refinance your mortgage, which means booking a new loan to replace the existing mortgage, usually at a lower rate. If you refinance and reach 20% equity with the new loan, your PMI will be removed.
Your lender or servicer must automatically cancel PMI when your mortgage balance hits 78% of the home's purchase price, or the month after you reach the loan term's midpoint. This is known as the final termination of PMI.
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Pay down your mortgage earlier
Paying off your mortgage early can help you get rid of PMI sooner rather than later. Here's how it works: You can request to have PMI removed when your mortgage balance reaches 80% of your home's value at the time you bought it. This is called the original property value. This is different from the home's current market value, which may have increased since you bought it. So, if you've been making regular mortgage payments and your loan balance is now at or below 80% of the original value, you can ask your lender to cancel PMI. This is according to the Consumer Financial Protection Bureau.
Let's say you bought a home for $200,000 and made a 10% down payment. Your mortgage started at $180,000. To reach the 80% mark, you would need to pay down the loan to $160,000. If you're making regular payments according to your loan's schedule, you'll eventually get to this point. However, if you want to accelerate the process, you can make extra payments toward your principal balance.
Making extra payments not only helps you reach the 80% threshold faster but also saves you money by reducing the total interest paid over the life of your loan. Just be sure to check with your lender before making extra payments to understand how it applies extra amounts to your loan balance. Some lenders may automatically apply any extra funds to interest or escrow accounts instead of directly reducing your principal balance. So, you'll want to clarify this with them beforehand.
You can also explore the option of refinancing to get rid of PMI. If you've built up at least 20% equity in your home and current interest rates are favorable, refinancing can eliminate PMI and also reduce your interest rate, lowering your monthly payments. Just keep in mind that refinancing comes with its own costs, including closing fees and other expenses, so be sure to run the numbers to ensure the benefits outweigh the costs.
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Refinance your mortgage
If you have an FHA loan, you can refinance to a conventional loan to get rid of your mortgage insurance premium (MIP). This is because MIP applies specifically to FHA loans. By refinancing to a conventional loan, you can eliminate your MIP.
You can also refinance your mortgage to avoid paying private mortgage insurance (PMI). If your home's value has increased due to rising home prices or renovations, you may now have the equity you need to refinance. This could allow you to get rid of PMI.
It's important to note that refinancing your mortgage to remove PMI is most relevant if you bought your home with less than a 20% down payment. In this case, you likely had to add PMI to your conventional loan to protect your lender in case you defaulted on payments.
To refinance your mortgage and remove PMI, you can follow these steps:
- Check with your lender for any rules or requirements before ordering an appraisal.
- Get a new appraisal to determine the current market value of your home.
- Calculate your loan-to-value (LTV) ratio by dividing your current unpaid principal balance by the new appraised value of your home.
- If your LTV ratio is below a certain threshold (typically 80%), you may be able to refinance your mortgage and remove PMI.
- Reach out to a mortgage loan officer to discuss your options and determine if refinancing is the right choice for you.
Keep in mind that refinancing your mortgage may not always be the best financial decision. Carefully consider your options and seek professional advice before making any decisions.
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Get a reappraisal
If you want to get rid of your private mortgage insurance (PMI) or your mortgage insurance premium (MIP) sooner, one option is to get a reappraisal. This is because the value of your home may have increased since you bought it, either due to rising home prices or because you've made improvements, such as renovations or upgrades.
Before ordering an appraisal, check with your lender for any rules or requirements they may have. You will likely have to pay a few hundred dollars for the appraisal, depending on your location and the characteristics of your property. Some lenders might accept a broker price opinion instead, which is often cheaper.
If the new appraisal shows that your loan balance is no more than 80% of the new valuation, you can ask for PMI cancellation. This is because federal law requires mortgage lenders to automatically cancel PMI when the balance of the mortgage drops to 78% of the home's purchase price, or when the loan term is at its halfway point, whichever comes first. You can request cancellation as soon as your balance hits 80% as long as your payments are up to date.
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Automatic termination
The automatic termination of private mortgage insurance (PMI) is governed by federal law and the Homeowners Protection Act of 1998 (HPA). Mortgage lenders or servicers are legally required to automatically cancel PMI under certain conditions.
Firstly, PMI must be cancelled when the mortgage's loan-to-value (LTV) ratio reaches 78% of the home's purchase price or original value. This is calculated by comparing the remaining principal balance of the mortgage to the original value of the home. The "original value" is defined as either the contract sales price or the appraised value of the home at the time of purchase, whichever is lower. If the property has been refinanced, the "original value" becomes the appraised value at the time of refinancing.
Secondly, PMI must be cancelled when the loan reaches the midpoint of its amortization schedule, typically halfway through the original full term of the loan. For example, a 30-year loan would reach its midpoint after 15 years. This standard for ending PMI halfway is more common for mortgages with an interest-only period, principal forbearance, or a balloon payment.
To ensure automatic termination, borrowers must be current on their monthly payments. It is important to note that loan investors, such as Fannie Mae and Freddie Mac, may have their own PMI cancellation guidelines, but these cannot be less favourable to the borrower than the federal regulations outlined above.
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Frequently asked questions
Mortgage insurance, also known as private mortgage insurance (PMI), is a safeguard that mortgage providers require when homebuyers make a down payment of less than 20% of the home's purchase price. It is an additional monthly cost that protects the lender in case you default on the loan.
PMI is calculated as a percentage of your mortgage loan amount. In 2022, it typically ranged from 0.58% to 1.86% annually. For example, if you have a $250,000 home loan, you can expect to pay anywhere from $1,250 to $2,500 per year, or between $104 and $208 per month.
There are several ways to remove PMI from your monthly mortgage payments:
- Wait until you qualify for automatic termination: Federal law requires lenders to automatically cancel PMI when the loan-to-value (LTV) ratio reaches 78% of the home's purchase price or when the loan term reaches its midpoint.
- Request PMI cancellation: You can request cancellation when your LTV ratio reaches 80% or lower, but you may need to submit documentation such as proof of home value and a solid payment history.
- Pay down your mortgage earlier: If possible, consider making additional mortgage payments to reduce your mortgage balance faster.
- Refinance: If your home has increased in value or interest rates have dropped, you may be able to refinance to a conventional loan and avoid paying PMI.
MIP is associated with Federal Housing Administration (FHA) loans. If your down payment is at least 10%, MIP will be removed after 11 years. If you have less than 10%, MIP will remain for the life of the loan. To remove MIP, you will need to contact your mortgage company and ask about their specific requirements, which typically include having a substantial amount of equity in your home.
Removing PMI can save you money in the long term by eliminating the additional monthly cost. It can also give you more control over your finances and help you take advantage of other investment opportunities.
