Jeffrey Wade
Private mortgage insurance (PMI) is a type of insurance that's usually required when homebuyers make a down payment of less than 20% of the home's value. It protects the lender if the buyer defaults on the loan. While it's not required forever, there are specific conditions that must be met for it to be cancelled. For example, federal law requires lenders to cancel PMI when the homeowner has made payments that reduce the principal amount owed under the mortgage to 80% of the home's value at the time it was purchased. Additionally, if the loan term is at its halfway point, lenders are required to cancel PMI upon request. It's important to note that different rules apply for mortgages through the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA).
| Characteristics | Values |
|---|---|
| When does private mortgage insurance (PMI) go away? | 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. |
| How to remove PMI? | By refinancing, getting a reappraisal, or paying down the mortgage faster. |
| When to ask for cancellation? | When the balance hits 80% of the original value of the home. |
| Who regulates PMI? | Federally chartered lenders or state-chartered lenders, depending on the lender. |
| What is PMI? | A type of mortgage insurance that's usually required with a conventional loan when the buyer makes a down payment of less than 20% of the home's value. |
| Who does PMI protect? | The lender, not the borrower, in the event that the homeowner defaults on a mortgage loan. |
| How much does PMI cost? | It's not cheap—it averages over $35 per month and can cost more than $100 per month. |
| How is PMI calculated? | As a percentage of the mortgage loan amount—in 2022, it typically ranged from 0.58% to 1.86% annually. |
| How to calculate the loan-to-original-value (LTOV) ratio? | Divide the current unpaid principal balance by the purchase price of the home or the appraised value at closing, whichever is less. |
| What is the difference between PMI and FHA mortgage insurance? | PMI is associated with conventional mortgage loans, while FHA mortgage insurance is associated with FHA loans. PMI can generally be removed when the homeowner has reached 20% equity in their home or has paid down their loan balance sufficiently. FHA mortgage insurance may involve refinancing and cannot be cancelled by paying down the mortgage principal faster. |
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What You'll Learn
- Lenders must cancel PMI when the mortgage balance drops to 78% of the home's purchase price
- PMI can be removed when the loan balance is 80% of the home's original value
- FHA and VA loans have different rules for removing PMI
- You can refinance, get a reappraisal or pay down your mortgage faster to remove PMI
- PMI is not homeowners insurance, it protects the lender, not the borrower
Lenders must cancel PMI when the mortgage balance drops to 78% of the home's purchase price
Private mortgage insurance (PMI) is a type of insurance that is usually required when homebuyers make a down payment of less than 20% of the home's value. It protects the lender if the buyer defaults on the loan. While PMI is not cheap, averaging over $35 per month, it can cost more than $100 per month. Therefore, it is in the homeowner's interest to stop paying PMI as soon as possible.
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 halfway through, whichever comes first. This is known as the Homeowners Protection Act or the PMI Cancellation Act. You can also request PMI cancellation as soon as your balance hits 80% of the original value of your home, as long as you are in good standing with your payments.
To calculate your loan-to-original value (LTOV) ratio, divide your current unpaid principal balance by the purchase price of your home or the appraised value at closing, whichever is less. You may then submit a written request to your mortgage servicer to cancel your PMI. Your servicer is legally required to grant your request as long as you meet certain criteria, such as having a good payment history and being current on your payments.
There are other ways to get rid of PMI ahead of schedule, including refinancing, getting a reappraisal, or paying down your mortgage faster. If you have an FHA loan, you may want to refinance to a conventional loan to eliminate your mortgage insurance premium (MIP).
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PMI can be removed when the loan balance is 80% of the home's original value
Private mortgage insurance (PMI) is a type of insurance that you must purchase if you buy a home with a down payment of less than 20%. It protects your lender in case you default on your mortgage, and you typically pay premiums as part of your monthly mortgage payment. The good news is that PMI does not last forever.
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. However, you can request early cancellation of PMI when your loan balance is 80% of the original value of your home. To do this, you must submit a written request to your mortgage servicer.
It is important to note that you can reach the 80% loan-to-value (LTV) threshold faster by making extra or larger payments on your mortgage. Additionally, rising property values in your area or investing in home improvements can help you build up equity in your home faster. By increasing the value of your home relative to the loan amount, you can get to the 80% LTV threshold sooner and request the cancellation of your PMI.
Keep in mind that different rules apply if your lender is paying for your mortgage insurance or if you have a mortgage through the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA). In these cases, you should contact your servicer to understand the specific requirements for cancelling your PMI.
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FHA and VA loans have different rules for removing PMI
FHA and VA loans have distinct rules regarding the removal or cancellation of PMI.
FHA loans require mortgage insurance, but it is not called PMI; it is called a mortgage insurance premium (MIP). The rules and costs for MIP differ from those of PMI. For instance, FHA loans require MIP regardless of the amount of the down payment or home equity. Furthermore, FHA loans have a one-time upfront mortgage insurance fee of 1.75% of the loan amount, which is usually added to the loan. Annual mortgage insurance for FHA borrowers varies depending on the loan balance and term, typically ranging from 0.40% to 0.75% of the loan amount per year.
VA loans, on the other hand, do not require PMI or any other form of ongoing mortgage insurance. This is a unique benefit, as most other home loans require some type of monthly mortgage insurance. However, VA loans do have a one-time VA funding fee, typically ranging from 0.5% to 3.30% of the loan amount. This fee helps fund the VA loan program for future generations.
It is important to note that the ability to remove or cancel PMI on conventional loans depends on meeting certain conditions. For example, federal law mandates that lenders automatically cancel PMI when the loan balance reaches 78% of the home's purchase price or at the halfway point of the loan term, whichever comes first. Additionally, borrowers can request PMI cancellation when their loan-to-original-value (LTOV) ratio falls below 80%.
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You can refinance, get a reappraisal or pay down your mortgage faster to remove PMI
Private mortgage insurance (PMI) is a type of insurance that your lender may require you to pay when you take out a conventional mortgage with a small down payment, typically less than 20% of the home's purchase price. It protects the lender if you default on your loan. While the requirements for removing PMI can vary, there are a few standard ways to remove it ahead of schedule, including refinancing, getting a reappraisal, or paying down your mortgage faster.
Refinancing
Refinancing your mortgage means getting a new loan and using the funds to pay off your existing one. This can help you remove PMI from your mortgage by allowing you to change the details of your mortgage, such as extending or shortening your repayment term or getting a different interest rate. To refinance and remove PMI, you will need to qualify for a loan without PMI, which may involve building more equity in your home or meeting the credit score requirements of a loan program that doesn't require PMI. Keep in mind that refinancing also involves costs, such as closing costs, and you will need to go through the underwriting process again.
Reappraisal
Getting a reappraisal, or a new appraisal, of your home can be another way to remove PMI. If your home's value has increased due to rising home prices or improvements you've made, a reappraisal can provide documented proof of its current worth. Before ordering an appraisal, be sure to check with your lender for any rules or requirements they may have.
Paying Down Your Mortgage Faster
You can also work towards paying down your mortgage faster to reach 20% equity and become eligible for PMI cancellation. This can be achieved by making additional principal payments on your mortgage, which will help you pay down the balance more quickly. You can make these extra payments in several ways, such as biweekly payments, an additional payment each year, or a lump sum at any time. However, be sure to check with your lender or servicer to ensure that these extra payments go towards the loan's principal and not just your next payment or interest.
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PMI is not homeowners insurance, it protects the lender, not the borrower
Private mortgage insurance (PMI) is a type of insurance policy that protects the lender, not the borrower, if a borrower defaults on a home loan. It is arranged by the lender and provided by private insurance companies. It insures the lender against losses caused by borrowers failing to make loan payments. If you fall behind on your mortgage payments, PMI does not protect you, and you can still lose your home through foreclosure.
PMI is typically required when a borrower's down payment is less than 20%. It is important to note that PMI is different from mortgage protection insurance (MPI), which is voluntary and protects the borrower. MPI covers mortgage payments if the borrower loses their job or becomes disabled or pays off the mortgage when the borrower dies.
There are a few ways to get rid of PMI. One way is to reach 20% equity in your home, at which point you can request to cancel the PMI. You can also ask for cancellation if your loan-to-original-value (LTOV) ratio falls below 80%. Federal law requires lenders to automatically cancel PMI when the loan reaches its halfway point or when the balance of the mortgage drops to 78% of the home's purchase price, whichever comes first.
Additionally, you can explore options like refinancing, getting a reappraisal, or paying down your mortgage faster to eliminate PMI ahead of schedule. It is important to note that the rules for cancelling PMI may vary depending on the loan type, such as FHA or VA loans, and it is always a good idea to consult your lender or mortgage servicer for specific guidelines.
In summary, while PMI provides financial protection to the lender in case of borrower default, it also enables borrowers to qualify for loans with smaller down payments. However, it is distinct from MPI, which offers financial protection to the borrower in the event of job loss, disability, or death.
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Frequently asked questions
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.
PMI is a type of mortgage insurance that's usually required with a conventional loan when the buyer makes a down payment of less than 20% of the home's value. It protects the lender if the buyer stops making loan payments.
You can request cancellation of PMI when you've reached 20% equity in your home or have paid your loan balance low enough to 80% of the original value of your home. You can also get a new appraisal, refinance, or pay down your mortgage faster.
