Orlando Harmon
Private mortgage insurance (PMI) is a common requirement for homeowners who purchase a home with less than 20% down. While it benefits the lender, it adds to your monthly mortgage cost. The good news is that it doesn't have to be permanent. There are several ways to eliminate PMI, including waiting for automatic cancellation, making additional mortgage payments, refinancing, or getting a new home appraisal. By law, lenders must automatically cancel PMI once your loan reaches 78% of the home's original purchase price or the month after you reach the midpoint of your loan term. You can also request early cancellation if your loan balance reaches 80% of the home's value.
| Characteristics | Values |
|---|---|
| When to drop monthly mortgage insurance | Once your mortgage balance reaches 78% of the home's original purchase price or the month after the halfway point of your loan's term, whichever comes first. |
| How to drop it | You can wait for automatic cancellation or request early cancellation in writing once your loan balance reaches 80% of the home's purchase price. |
| Types of mortgage insurance | Private mortgage insurance (PMI) and mortgage insurance premium (MIP) are the two main types. PMI is associated with conventional loans and can be removed once the homeowner builds enough equity. MIP is specific to FHA loans and is required regardless of the down payment. |
| Alternatives to PMI | Lender-paid mortgage insurance (LPMI), split-premium PMI, and single-premium PMI. |
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What You'll Learn
Request cancellation when the loan-to-value ratio is 80%
Private mortgage insurance (PMI) is typically required for borrowers with a loan-to-value (LTV) ratio of more than 80%. This insurance protects the lender in the event of default or foreclosure on the loan. While PMI provides security for lenders, it adds an extra cost to the borrower's monthly payments.
To avoid paying PMI, borrowers can aim for an LTV of 80% or lower. This is generally considered a good LTV ratio, indicating a lower risk for the lender. When the LTV is 80% or less, the borrower may request cancellation of PMI. This can result in cost savings and a lower interest rate on the mortgage.
To calculate the LTV ratio, divide the loan amount by the property's appraised value and express it as a percentage. For example, if you take out a loan of $150,000 to purchase a house appraised at $200,000, the LTV ratio is 75% ($150,000/$200,000 x 100). By making a larger down payment, borrowers can lower their LTV ratio.
It's important to note that the LTV ratio can change over time as the value of the property fluctuates. If the property's value increases, the LTV ratio decreases, and vice versa. Therefore, borrowers should monitor their LTV ratio and may consider requesting a professional appraisal if they believe their LTV has dropped below 80%.
In summary, requesting cancellation of PMI when the LTV ratio reaches 80% can be a beneficial strategy for borrowers. It eliminates the extra cost of PMI and may lead to more favourable terms on their mortgage.
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Wait for automatic cancellation at 78% LTV
If you have a mortgage with a loan-to-value (LTV) ratio of less than 80%, you may be able to request that your mortgage servicer cancel your private mortgage insurance (PMI). However, if you are willing to wait, federal law and the Homeowners Protection Act of 1998 (HPA) require that mortgage lenders or servicers automatically cancel PMI when the mortgage's LTV ratio reaches 78% of the home's purchase price. This typically happens either when the balance of the mortgage drops to 78% of the home's purchase price or when the loan term is at its midpoint, whichever comes first.
For example, if you have a 30-year loan, the automatic cancellation of PMI will occur after 15 years or when the mortgage balance hits 78% of the home's purchase price, whichever comes first. It is important to note that the automatic cancellation of PMI at 78% LTV is based on the original appraisal value of the home. If the value of the home has declined, you may need to wait until the loan term's midpoint to have PMI automatically cancelled.
While waiting for automatic cancellation at 78% LTV is a hands-off option, it may result in paying more for PMI than necessary. By requesting early cancellation at 80% LTV, you can save money on PMI premiums. However, it is essential to ensure that your loan is in good standing and that you meet all the criteria set by your lender or servicer for early cancellation.
In summary, waiting for automatic cancellation at 78% LTV is a straightforward way to get rid of PMI without having to take any proactive steps. However, it may result in paying slightly higher PMI premiums compared to requesting early cancellation at 80% LTV. The decision to wait or request early cancellation depends on individual circumstances and preferences.
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Refinance to a conventional loan
If you have a Federal Housing Administration (FHA) loan, you will have to pay a mortgage insurance premium (MIP) no matter how much you put down on the loan. In many cases, you will pay it for the life of the loan. However, if you take out an FHA loan and put down at least 10%, you will only pay MIP for 11 years.
One way to get rid of MIP is to refinance to a conventional loan. When refinancing to a conventional loan, you can get into a home with as little as 3% down. However, you will have to pay private mortgage insurance (PMI) if your down payment is less than 20%.
PMI will automatically be cancelled when your mortgage balance reaches 78% of your home's purchase price, or the month after you reach the midpoint of your loan term. For example, if you have a 30-year loan, your PMI will be cancelled after 15 years. You can request that your lender cancels PMI sooner, when your mortgage balance hits 80% of your home's purchase price. To do this, you must submit a written request to your lender or servicer. You must also be current on your mortgage payments and confirm that there are no other liens on your home.
If you have built up equity in your home, you may be able to refinance into a different program that doesn't require PMI, even if your loan-to-value (LTV) ratio is over 80%. Some examples of mortgage loan programs that don't require PMI include the Neighborhood Assistance Corporation of America (NACA) Best in America Mortgage and the Bank of America Affordable Loan Solution® mortgage. VA loans, which are authorized by the Department of Veterans Affairs, also do not require ongoing mortgage insurance and offer competitive mortgage rates.
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Get a new home appraisal
Private mortgage insurance (PMI) is a type of insurance that covers the risk of financing a mortgage with less equity from the buyer. It is usually required when a homebuyer puts down less than 20% on a conventional loan. The cost of PMI can range from $30 to $70 per month for every $100,000 borrowed, and it is typically paid as part of the monthly mortgage payment.
To remove PMI from your loan, there are a few conditions that must be met. One way to do this is by getting a new home appraisal to confirm that the value of your home has increased. This can be done through renovations, upgrades, or simply due to rising home prices. Before getting a new appraisal, it is important to check with your lender for any rules or requirements they may have. Some lenders may require the use of specific appraisers, while others may accept a broker price opinion, which is usually cheaper.
The appraisal will determine the loan-to-value (LTV) ratio, which is calculated by dividing the loan balance by the original purchase price or the appraised value at closing, whichever is lower. If the LTV ratio falls below 80%, you may submit a written request to your mortgage servicer to cancel your PMI. It is important to note that your loan must be in good standing, with no missed payments or other complicating factors such as a lien on the home.
Additionally, if you have owned the home for at least two years, your remaining mortgage balance must not be greater than 75% to remove PMI. This is known as the halfway point rule, where the mortgage lender is required to automatically cancel PMI when the loan term reaches its midpoint, such as 15 years into a 30-year loan.
By getting a new home appraisal and meeting the necessary conditions, you can successfully remove PMI from your loan and save on your monthly mortgage payments.
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Make additional mortgage payments
Making additional mortgage payments can help you get rid of your monthly mortgage insurance or private mortgage insurance (PMI) sooner. Here are some ways to do it:
Understand the Requirements for Dropping PMI:
Before making additional payments, understand the conditions under which you can drop PMI. Typically, you can request to cancel PMI when your loan-to-original-value (LTOV) or loan-to-value (LTV) ratio falls below 80%. This means that your remaining mortgage balance should be no more than 80% of the original value or purchase price of your home. Additionally, your payments need to be current and in good standing.
Calculate Your LTOV or LTV Ratio:
To determine if you've reached the required threshold, calculate your LTOV or LTV ratio. You can do this by dividing your current unpaid principal balance by the purchase price of your home or the appraised value at the time of closing, whichever is lower. If your ratio falls below 80%, you're on the right track.
Make Additional Payments:
To accelerate reaching the 80% threshold, consider making additional payments toward your mortgage principal. This will reduce your outstanding balance and bring you closer to the point where you can request PMI cancellation. Ensure that your lender allows early payments without penalties.
Request PMI Cancellation:
Once your LTOV or LTV ratio falls below 80%, you can submit a written request to your mortgage lender or servicer to cancel PMI. Provide any necessary documentation, such as an appraisal to confirm the current value of your home. Your lender is legally required to grant your request as long as you meet the criteria.
Refinance or Reappraise Your Home:
If you're unable to make additional payments, consider refinancing your mortgage or getting a reappraisal of your home. With rising home values, refinancing can help you build equity and avoid PMI. A reappraisal can also help if the value of your home has increased due to improvements or market conditions.
Remember, making additional mortgage payments is just one strategy to drop PMI. It's important to weigh your financial options and ensure that your payments are current and up to date to qualify for PMI cancellation.
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Frequently asked questions
Under the Homeowners Protection Act of 1998, lenders must automatically cancel PMI when the mortgage’s loan-to-value (LTV) ratio reaches 78% of the home’s purchase price, or the month after you reach the loan term’s midpoint. You can also request PMI removal once your loan balance reaches 80% LTV.
Private mortgage insurance (PMI) is a common requirement for homeowners who purchase a home loan with less than 20% down. Mortgage insurance premiums (MIP), on the other hand, are associated with FHA loans and are required for all borrowers, regardless of their down payment.
If you don't meet the criteria for automatic MIP cancellation, refinancing to a conventional loan is usually the best way to remove FHA mortgage insurance. When you refinance, you take out a new loan to pay off your existing FHA loan. If you have sufficient equity (generally 20% or more), you can refinance into a conventional loan without any mortgage insurance required.
