How to Remove Private Mortgage Insurance (PMI)
When home prices are high, saving money for a large down payment can be tough and stretch your budget. Private mortgage insurance (PMI) offers a solution, but it adds to your monthly payments. PMI falls off either automatically once you gain enough equity, by requesting its termination or by refinancing your loan. Read on to find out more on how to remove PMI.
How does PMI work?
Lenders approve loans based on a variety of factors, such as your credit, finances and the value of the home you’re buying. They use this information to make an educated guess that you’ll be able to repay the loan. If you’re unable to make payments, the loan goes into default and, ultimately, foreclosure. Unlike other types of insurance that protect you, PMI protects the lender in a foreclosure.
Conventional loan PMI kicks in when you’re buying a house with a down payment of less than 20% or you’re refinancing and you have less than 20% equity in the home. Buyers who purchase with a traditional 80/20 mortgage, or a loan for 80% of the purchase price and a 20% down payment, can avoid PMI.
If you’re buying or refinancing with a loan backed by the Federal Housing Administration (FHA) you’ll pay a different type of mortgage insurance that typically can’t be cancelled unless you put down 10%. Other government loans, such as those insured by the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA), require upfront funding fees but not PMI.
The cost of PMI
Annual PMI rates for a conventional loan range from 0.15% to 1.95% of the loan amount. According to Freddie Mac, PMI payments average $30 to $70 per month for each $100,000 you borrow. If you borrow $200,000, you can save an average of $60 to $140 each month with a PMI removal.
PMI payments are calculated by the mortgage insurance company based on several factors, namely the size of your down payment (or your home equity if you’re refinancing) and your credit score. Other factors can raise or lower the size of your PMI payment, which can make it harder to figure out how to calculate PMI. For example, your PMI payment may be higher if you borrow above the conforming loan limit, which is $510,400 in most markets. PMI rates are typically higher on second homes and investment properties, too.
Use a mortgage calculator to figure out how much PMI you might pay.
How to remove PMI in 4 steps
It’s important to know how long PMI lasts. FHA loans typically have mortgage insurance that lasts for the life of the loan unless you’ve made a down payment of at least 10%, in which case, you can remove PMI after 11 years.
For conventional loans, the Homeowners Protection Act of 1998, also known as the PMI Cancellation Act, set mandatory guidelines for mortgage lenders so that consumers can understand when they can stop paying PMI. Here are four options for how to remove PMI:
1. Wait for PMI to terminate automatically
When does PMI drop off? According to the PMI Cancellation Act, your PMI payment drops off when your loan balance reaches 78% of the original value of your home. You don’t need a new appraisal because the home’s value is based on the appraised value when you purchased it or when refinanced into a new loan.
Your PMI termination will also happen when you reach the midpoint of your loan, even if your loan balance isn’t 78% of your home’s original value. This can happen if you had an interest-only period or perhaps a stretch of loan forbearance. On a 30-year loan, the midpoint would be at 15 years.
In both cases, you must be up-to-date on your loan payments to have your PMI removed. If you have late payments, your PMI will be cancelled once your loan is in good standing.
2. Request PMI cancellation
If you’d rather not wait for automatic PMI cancellation, you can speed up the process when your loan balance is 80% of the lesser of either the original price of your home or the appraised value of your home when you bought it. The date when you reach 80% should appear in your loan paperwork, but if you can’t find it, request it from your lender. If you refinanced, the value of your home refers to its appraised value when you refinanced, not when you first bought it.
You may also have reached the 80% target if you’ve made extra payments to lower your balance. Check your most recent mortgage statement and compare it to your paperwork to see if you can remove PMI.
To cancel your PMI payments, you’ll need to be up-to-date on your mortgage payments and have a good payment history. Send a PMI cancellation letter to your lender, who will likely check whether you have any liens or second mortgages on the property. In addition, your lender may require an automated valuation by the lender or a new appraisal to ensure your home value hasn’t declined.
3. Refinance to get rid of PMI
Another option is to refinance to get rid of PMI. Unlike requesting a cancellation, which is free, refinancing requires you to pay closing costs and provide documentation of your home’s value and your income, assets and credit. Consult a lender to decide if you should refinance to remove PMI and compare the costs to refinance, your new monthly payments and your current payment.
Refinancing is usually the only option for FHA loan PMI removal, so a consultation with a lender is valuable. If you have good credit you may qualify for the lowest interest rates on a conventional loan. If you have at least 20% in home equity, you can avoid PMI payments on the new loan.
4. Get a new appraisal if your home value increases
Can I cancel PMI if my home value increases? You’ll need an appraisal to prove that the value is high enough so that your loan is 80% or less of the new value. There are several ways to find out if your home value has gone up.
First, you can ask a real estate agent for an opinion of your home’s value. You can also check recent home sales or review online home-value estimations. Ultimately, you’ll need an appraisal to confirm your home’s value. If your home’s value has increased enough to reach 20% equity, follow the same process for requesting PMI removal with a PMI cancellation letter.
How to get a no-PMI mortgage
If you prefer a no-PMI mortgage, there are ways to avoid paying for the insurance or worrying about how to remove PMI. Here are some solutions to consider:
- A bigger down payment. If you want a mortgage without PMI, you’ll need to make a down payment of at least 20%. Remember to keep some cash on hand for home repairs and other emergencies.
- Piggyback loans. No-PMI loans also include “piggyback” loans or “80-10-10” loans. Borrowers take out a first mortgage for 80% of the home value, a second loan for 10% and make a down payment of 10%. Typically, you’ll need good credit and enough income to cover the payments. The interest rate on a second mortgage will be higher than the rate on the first loan.
- Lender-paid PMI loan. Lender-paid PMI loans mean that the lender pays the PMI but you’ll pay a higher interest rate for the life of the loan. You and your lender should compare those options to see if the higher rate is worth the PMI payment savings.
- VA or USDA loan. If you’re a military borrower or you’re purchasing in a rural area, you may qualify for a VA loan or a USDA loan guaranteed by the U.S. Department of Agriculture. While those loans don’t require PMI or a down payment, they do come with upfront funding fees and eligibility requirements.