Orlando Harmon
Private mortgage insurance (PMI) is an additional cost that is often required when homebuyers put down less than 20% of the purchase price on a conventional mortgage. It serves as a safeguard for lenders in case the buyer defaults on their loan. While PMI can enable homebuyers to achieve their dreams of owning a home, it is an extra fee that many are eager to remove. The good news is that there are several strategies to get rid of PMI, including automatic PMI termination, requesting PMI cancellation, paying down your mortgage early, or refinancing. The specific method you choose will depend on your financial situation and the terms of your loan.
| Characteristics | Values |
|---|---|
| When PMI applies | When a homebuyer provides a down payment of less than 20% on a conventional mortgage |
| How to get rid of PMI | Automatic PMI termination, requesting PMI cancellation, paying down your mortgage or refinancing |
| PMI cancellation requirements | The principal loan balance reaches 80% of the home's purchase price, the loan-to-value (LTV) ratio is 80% or lower, and the borrower has made regular payments |
| Cost of PMI | 0.1%-2% of the loan amount per year, depending on the down payment amount, credit score, mortgage amount, and mortgage type |
| Benefits of PMI | Allows homebuyers to buy a home with a low down payment (as little as 3%) and protects the lender if the buyer defaults on the loan |
| Drawbacks of PMI | Increases the cost of the loan over time and can be expensive for those with low credit scores |
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What You'll Learn
Request PMI cancellation when your mortgage balance reaches 80% of the property's value
If you've owned your home for at least five years, you can request PMI cancellation when your mortgage balance reaches 80% of the property's value. This is known as reaching 20% equity in your home. You can estimate the amount your mortgage balance needs to reach by multiplying your home's purchase price by 0.80.
To make a PMI cancellation request, you must contact your lender or servicer in writing. It is important to be current on your mortgage payments and have a good payment history. You must also ensure that your mortgage is the home's only debt, including second mortgages, home equity loans, and lines of credit.
If you've owned the home for at least two years, your remaining mortgage balance must be no greater than 75% of the property's value. In this case, some lenders might be willing to accept a broker price opinion instead of a home appraisal to verify the new market value.
It is worth noting that you can also wait for automatic PMI termination. This happens when your mortgage balance hits 78% of the home's purchase price or the month after the halfway point of your loan's term, whichever comes first.
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Pay down your mortgage earlier
Paying down your mortgage earlier is one of the ways to drop PMI mortgage insurance. Here are some strategies to help you pay off your mortgage earlier:
Create a budget
Start by creating a monthly budget if you don't already have one. Write down your income, list your expenses, and subtract your expenses from your income to ensure you're not overspending. Then, track your spending during the month to make sure you stay on target. This will help you identify areas where you can cut back and free up money to put towards your mortgage.
Increase your monthly payments
If you have a low-interest rate on a long-term loan, such as a 30-year mortgage, you can treat it like a shorter-term loan by increasing your monthly payments. For example, you can make biweekly payments, which will result in an extra principal payment every year, helping you pay off your loan faster. Alternatively, you can round up your monthly payments to the nearest $100. This will help you reduce the term of your mortgage and save on interest.
Make extra payments
Making extra payments towards your mortgage can help you pay it off faster and reduce the amount you pay in interest. Consider using bonuses, raises, or other forms of extra income to make these extra payments. Just make sure to inform your lender that these extra payments should be applied to the principal balance and not towards future interest or monthly payments.
Refinance your mortgage
If interest rates have declined, consider refinancing your mortgage to take advantage of the lower rates. You can also look into refinancing to a shorter-term loan, such as a 15-year mortgage, which will help you pay off your loan faster and save you a significant amount in interest. However, keep in mind that a shorter-term loan will result in larger monthly payments.
Downsize your home
If you're determined to pay off your mortgage faster, consider downsizing to a smaller, less expensive home. By selling your larger home and using the profits to buy a new one, you may be able to reduce your debt significantly or even pay for your new home in full. Remember, the goal is to get rid of your mortgage as quickly as possible, so use any profits from downsizing to accelerate your payoff.
By implementing these strategies, you can work towards paying off your mortgage earlier, which will not only help you drop PMI mortgage insurance but also provide you with financial stability and savings in the long run.
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Refinance your mortgage
Refinancing your mortgage is one of the ways to get rid of PMI. However, it is not the best option for everyone. When you refinance a mortgage, your lender will typically order an appraisal. If your home has appreciated since the original loan, you could end up with more equity than expected.
Appraisal
You don't need to refinance to get a new appraisal. If you believe your home is worth significantly more than it was, you can get a professional appraisal done. This will tell you and your lender what your home is valued at. If you were already close to the 20% mark, the appraisal might push you over the edge. Be sure to contact your lender or loan servicer once it's done so they can take it into consideration.
Costs
Refinancing comes with its own set of costs, such as closing costs. You'll need to factor these into your decision. Additionally, if you opt for a cash-out refinance, the money you take out will reduce your equity.
Interest rates and loan terms
You'll need to consider the new loan's interest rate, terms, and other factors to decide whether refinancing makes sense for you. For example, if you get a much shorter term or higher APR, you could end up with a larger monthly payment, even without PMI.
Lender's criteria
Different lenders have different criteria for removing PMI. Some lenders may allow removal of PMI under their own standards. Check with your lender to understand their specific criteria for removing PMI.
Removal of LPMI
It's important to note that you can only remove LPMI (Lender-Paid Mortgage Insurance) by refinancing. If you're considering removing LPMI, refinancing is the way to go.
Removal of FHA MIP
If you're looking to remove FHA MIP without a 10% down payment on FHA loans made after a certain date, refinancing is an option. However, you'll need to consider the rate and payment you have compared to what's available on the current market.
In conclusion, while refinancing your mortgage can be a way to get rid of PMI, it's important to carefully consider the costs, interest rates, loan terms, and your lender's criteria before making a decision.
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Reappraise your home
If your home's value increases due to appreciation or renovations, you may be able to request a PMI cancellation. To do this, you will need to pay for a home appraisal to verify the new market value. An appraisal usually costs a few hundred dollars, depending on the location and characteristics of your property. Some lenders may be willing to accept a broker price opinion, which is often cheaper.
If your home has appreciated in value, you can request a PMI cancellation when your mortgage balance reaches 80% of the original value of your home. The first date you can make the request should appear on your PMI disclosure form, which you would have received along with your mortgage. If you can't find the disclosure form, contact your servicer.
You can ask 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. For this purpose, "original value" generally means either the contract sales price or the appraised value of your home at the time you purchased it, whichever is lower. However, if you have refinanced, the "original value" is the appraised value at the time you refinanced.
Your servicer is legally required to grant your request to cancel PMI as long as you meet the criteria. You can provide evidence, such as an appraisal, that the value of your property hasn't declined below the original value of the home. If it has, you may not be able to cancel PMI as scheduled.
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Wait for automatic PMI termination
One option for dropping Private Mortgage Insurance (PMI) is to wait for automatic termination. This will happen when your mortgage balance reaches 78% of the original value of your home. This is usually the month after the halfway point of your loan's term. You must be current on your monthly payments for automatic termination to occur.
If you wait for your lender to automatically cancel PMI, you will pay more than if you request early cancellation. However, requesting early cancellation requires you to pay for a home appraisal to confirm your home's value hasn't decreased. An appraisal usually costs a few hundred dollars, depending on location and the characteristics of your property. Some lenders might be willing to accept a broker price opinion, which is often cheaper.
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 request PMI cancellation. You can find the date that your loan balance reaches 80% on your PMI disclosure form. If you don't have this form, you can request it from your servicer.
Your servicer must notify you in writing within 30 days of the cancellation or termination of PMI. They must also return all unearned PMI premiums to you within 45 days of termination.
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Frequently asked questions
Private Mortgage Insurance (PMI) is an additional monthly cost that is added to your mortgage payment. It is required when homebuyers provide a down payment of less than 20% of the home's purchase price on a conventional mortgage.
There are a few ways to get rid of PMI. You can request PMI cancellation when your mortgage balance reaches 80% of the property's original value. You can also pay down your mortgage earlier, refinance your mortgage, or wait for automatic PMI termination.
PMI is associated with conventional mortgage loans, while FHA mortgage insurance is associated with FHA loans. PMI can generally be removed from your monthly mortgage payment when you've reached 20% equity in your home or have paid your loan balance down to 80% of the original value of your home. FHA mortgage insurance is more complicated and may involve refinancing.
