How to get rid of PMI for good
Private mortgage insurance, or PMI, is a big cost for homeowners — often $100 to $300 per month. Fortunately, you’re not stuck with PMI forever. Once you’ve built up some equity in your home, there are multiple ways to get rid of mortgage insurance and lower your monthly payments.
Some homeowners can simply request PMI cancellation once their mortgage balance reaches 80% of the home’s original value. But you may be able to get rid of PMI early. Here’s what you need to know about your options.
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How to get rid of mortgage insurance: Key takeaways
If you have a conventional loan and your down payment was less than 20%, you’re probably paying for private mortgage insurance. PMI is a type of insurance that protects your mortgage lender if you default on your loan repayments.
While you pay for PMI each month, it doesn’t benefit you in any way — aside from allowing a smaller down payment when you first bought your home. But as you steadily pay down your mortgage balance and build equity, you’ll have several paths to remove PMI once and for all.
When does PMI go away?
Your mortgage lender must automatically cancel PMI for free when your mortgage balance reaches 78% loan-to-value (LTV). In other words, once you’ve paid 22% of your mortgage, your lender is required by law to terminate PMI.
Furthermore, your lender must cancel PMI at your written request once your mortgage balance reaches 80% LTV.
PMI will also be terminated once you reach the midpoint of your amortization. “So, for a 30-year loan, at the midway point of 15 years PMI should automatically cancel,” says Keith Baker, Mortgage Banking Program coordinator and faculty at North Lake College.
Keep in mind that you’ll need to have a history of on-time payments and not miss any mortgage payments whatsoever to be eligible.
Also, note that these rules only apply to removing PMI from conventional loans. The rules for government-backed loans, most notably the FHA loan, are quite different. Removing mortgage insurance premiums (MIP) from an FHA loan typically involves refinancing into a new type of loan. But that’s not necessarily the case for getting rid of PMI from a conventional mortgage.
5 ways to get rid of PMI
Understandably, most homeowners would rather not pay for private mortgage insurance. Luckily, there are multiple ways to get rid of mortgage insurance if you’re eligible.
1. Wait for PMI to automatically cancel
PMI automatically drops off of conventional loans once the loan balance is at or below 78% of the home’s appraised value. This is called “automatic cancellation.” And, by law, your mortgage lender is required to terminate PMI from your loan at no cost to you.
Even though automatic cancellation should occur without any effort on your part, it’s always a good idea to be proactive. You can request a copy of your PMI cancellation schedule from your lender. You’ll know the exact month that your PMI should disappear from your mortgage payment.
2. Request PMI cancellation
You can also request PMI removal when your mortgage reaches 80% loan-to-value ratio, instead of waiting for PMI to fall off at 78%. If you’re eligible, your lender must terminate. However, unlike automatic cancellation, you’ll generally need to submit a request in writing. But the process may vary from one lender to another.
Again, review your PMI disclosures to determine when you qualify for cancellation. You can even prepay your loan’s principal to speed up your cancellation date. Some homeowners make an extra mortgage payment each year to reach 80% LTV faster. But even $50 extra each month can help cancel PMI sooner.
3. Get a new home appraisal
With home values rising nationwide, some homeowners may reach 80% LTV sooner than their repayment schedules indicate. That’s because you can request early cancellation based on your home’s current value, but you’ll need a new home appraisal to do so. You’ll also need to meet one of these criteria.
Here’s how early cancellation works:
- If you’ve lived in your home for at least two years and have a 75% LTV
- If you’ve lived in your home for at least five years and have an 80% LTV
However, check with your lender before spending money on a new appraisal. Each mortgage servicer will have their own requirements.
“You may be able to do this with a new appraisal, but not all lenders will allow this. It usually needs to be based on the original loan terms and home value when you secured your loan. Otherwise, you need to refinance to get the new value considered,” notes Jon Meyer, The Mortgage Reports loan expert and licensed MLO.
If you meet the requirements to get rid of mortgage insurance, you could start saving on your home loan immediately.
4. Refinance to get rid of mortgage insurance
If interest rates have dropped since securing your current mortgage, then refinancing could save you money. In addition to fetching a lower rate, a mortgage refinance may get rid of PMI when your new mortgage balance is less than 80% of the home value.
While refinancing to remove PMI can be a smart move, it’s not always the right decision.
“Refinancing to eliminate PMI will require paying closing costs, which can include host fees,” says Baker.
“You need to make sure refinancing won’t cost you more than you save.” -Keith Baker, Mortgage Banking Program Coordinator, North Lake College
“You should calculate the savings versus costs to see how long it will take for the savings to cover the cost of the new loan. If it is longer than you will probably stay in the home, it’s probably not a smart decision to refinance,” says Realtor and real estate attorney Bruce Ailion.
“Plus, if your credit score is below 700, note that conventional loans through Fannie Mae and Freddie Mac charge loan level pricing adjusters,” adds Mike Scott, senior mortgage loan originator for Independent Bank. “This may knock the new mortgage rate up compared to what you are currently paying.”
5. Refinance into a non-PMI loan program
It’s also possible to refinance into a different program — one that doesn’t require PMI, even with an LTV over 80%.
Here are just a few examples of mortgage loan programs that don’t require private mortgage insurance:
- Neighborhood Assistance Corporation of America (NACA) Best in America mortgage
- Bank of America Affordable Loan Solution® mortgage
“The interest rate [on non-conforming loan products] may be slightly higher than on a conventional loan,” says Wendy Stockwell, VP, Embrace Home Loans. “But the elimination of mortgage insurance payments ends up reducing your total monthly mortgage payment.”
VA loans — mortgages authorized by the Department of Veterans Affairs — do not require ongoing mortgage insurance. And they offer competitive mortgage rates. If you’re a veteran or a current service member, the VA loan program offers a great way to save money.
Is PMI bad?
PMI annoys a lot of homeowners, and it’s easy to understand why: You’re paying for coverage that protects your lender, not you. The same is true for the Federal Housing Administration’s MIP requirement for FHA loans.
But mortgage insurance coverage isn’t all bad. In fact, without it, you’d probably be paying a higher interest rate because your lender would take a bigger risk on your loan. This is especially true for homeowners who made the minimum 3% down payment on a conventional loan or put only 3.5% down on their FHA loan.
Still, when you can stop making this extra payment — without erasing your savings in closing costs or a higher mortgage rate — you should do so.
How to get rid of PMI FAQ
Different lenders and loan servicers use varying strategies to determine your loan-to-value ratio (LTV). Some calculate LTV based on your home’s original purchase price; others rely on your original home appraisal. You could also pay for a new appraisal if your home’s current value has risen since you first purchased it. An appraisal may cost as much as $500. But the fee would be worth it if your home’s current value shows you have 20 percent home equity — enough equity to cancel PMI on a conventional mortgage, which will save money each month.
The Homeowners Protection Act of 1998 requires that lenders disclose mortgage insurance requirements to homebuyers. The law requires loan servicers to cancel PMI automatically when your LTV falls to 78 percent. You can request PMI cancellation when the LTV falls to 80 percent.
First, check your numbers. Your loan servicer may be using your original purchase price to calculate LTV. You may need a new appraisal to show your home’s current value has increased since your original home appraisal or sales price. If you think your loan servicer violates the Homeowners Protection Act, report your experience to the Consumer Financial Protection Bureau.
On average, PMI costs 0.5 to 1.5 percent of the loan amount annually. On a $200K loan, PMI would cost about $1,000 to $3,000 each year, or $83 to $250 per month. PMI rates depend on your credit score and the size of your down payment.
PMI premiums are non-refundable. Think of it like your car insurance: You pay premiums, and the insurer only pays out if something bad happens. The one exception to this rule is for FHA Streamline refinances. If a homeowner refinances an existing FHA loan into a new FHA loan within three years, they can get a partial refund of the original loan’s upfront MIP payment. Qualifying for this loan is usually easy if you have a good payment history for the past three consecutive months.
It’s worth refinancing to remove PMI if your savings outweigh your refinance closing costs. You should also consider how long you plan to stay in the house after refinancing. If it’s only a few years, you might spend more to refinance than you save. But if you’ll stay in the house another five or more years, refinancing out of PMI is often worth it. It may also be worthwhile to get a no-closing-cost refinance or roll closing costs into your loan balance.
If you refinance to get rid of PMI, the process will include a new property value to verify that your loan is below 80 percent LTV. For homeowners with a conventional mortgage loan, you can get rid of mortgage insurance with a new appraisal if your home value has risen enough to put you over 20 percent equity. However, some loan underwriters will re-evaluate PMI based only on the original appraisal. So contact your servicer directly to learn about your options.
All FHA loans include MIP; it’s the type of mortgage insurance that’s exclusive to FHA loans. But if you have sufficient home equity (at least 20 percent), you can refinance your FHA loan into a conventional loan without PMI.
If you’re still in the process of shopping for a loan, you can avoid PMI by choosing a special, no-PMI loan, or by getting an 80/10/10 piggyback loan that simulates a 20 percent down payment. If you already have a mortgage with PMI, you might be able to refinance into a no-PMI loan.
PMI (or MIP on FHA loans) is usually worth your money if it lets you buy a home sooner. Almost all mortgage programs with less than 20 percent down require mortgage insurance. As a result, mortgage insurance is popular with home buyers who don’t want to wait years to save up a huge down payment. Remember, you do not have to pay PMI for the life of the loan. You can remove it or refinance out of it later on.
Getting a second mortgage, such as a home equity loan or a home equity line of credit, should not require additional PMI payments. PMI applies only to your home’s original lien. In fact, a second mortgage can even help you avoid PMI by covering a portion of your down payment on a home purchase, via the 80-10-10 piggyback mortgage option.
USDA loans require their own brand of mortgage insurance. It tends to be less expensive than the FHA’s MIP requirements. VA loans do not require any ongoing mortgage insurance. VA borrowers do pay an upfront VA funding fee. Only active-duty military members and veterans can use a VA loan.
You can find your loan-to-value ratio by dividing your current mortgage balance by your property value and then multiplying that answer by 100. For example, if you owe $175,000 and your house is worth $200,000, you’d divide $175,000 by $200,000 to get 0.875. Multiply that answer by 100 and you’ll have your LTV: 87.5 percent. The owner of this house would need to pay the mortgage’s principal balance down to $160,000 to achieve an LTV of 80 percent, which is low enough to request PMI cancellation on a conventional loan.
Check your refinance eligibility
Refinancing to get rid of PMI can cut your mortgage costs by a large margin and save money for months or years to come. In addition to dropping mortgage insurance, you could potentially lower your rate and save on interest over the life of the loan.
