How to get rid of private mortgage insurance (PMI)?
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If you made a minimal down payment when buying your home — less than 20 percent of the purchase price, to be precise — you’re probably all too familiar with PMI, or private mortgage insurance. This surcharge, included along with the principal and interest in your monthly mortgage payments, can add hundreds if not thousands of dollars to your housing costs each year. Annoying, especially since these insurance premiums protect your lender, not you, in the event that you default.
That’s the bad news. Now the good news: This extra expense won’t last forever. Each year, your PMI is recalculated using your current loan balance, so the amount you pay will decrease as you pay down the loan.
And once you build up enough home equity, you’ll be able to eliminate PMI entirely. There are several different ways you can go about this, so it’s highly likely you’ll find one that will work for your finances.
6 ways to get rid of PMI
1. Wait until you qualify for automatic or final termination of PMI
A federal housing regulation informally called the “PMI Cancellation Act” assists homeowners trying to get rid of their PMI. The Homeowners Protection Act of 1998 — as it is officially named — confers “automatic” or “final” PMI termination at specific home equity milestones, provided your mortgage is in good standing and you haven’t missed any monthly payments.
The act dictates that your mortgage lender or servicer must automatically terminate PMI when your loan-to-value (LTV) ratio drops to 78 percent — in other words, when your mortgage balance reaches 78 percent of the purchase price of your house.
Alternatively, the servicer must cancel the PMI at the halfway point of your loan’s amortization schedule. For example, if you have a 30-year mortgage, the midpoint would be after 15 years; if you have a 15-year loan, the halfway point is 7.5 years. The PMI must stop even if your mortgage balance hasn’t yet reached 78 percent of the home’s original value. This is known as final termination.
Who this affects: Removing PMI in this way works for folks with conventional mortgages who have paid according to their original payment schedules and have reached the milestones of 22 percent equity or the halfway point in time. In both cases, the loan must be current and the borrower in good standing: no delinquent, skipped or insufficient payments.
2. Request PMI cancellation when mortgage balance reaches 80%
Another way the PMI Cancellation Act benefits you is by granting you the right to remove PMI once you have paid off enough of your mortgage principal to reach 20 percent home equity; that is, once your loan balance reaches 80 percent of the home’s original value.
Who this affects: If you’re making payments as scheduled, you can find the date that you’ll get to 80 percent on your PMI disclosure form (or you can request it from your servicer). However, you need to be proactive.
You must do the following to cancel PMI:
- Make the PMI cancellation request to your lender or servicer in writing.
- Be current on your mortgage payments, with a good payment history.
- Meet other lender requirements, such as having no other liens on the home (i.e., a second mortgage).
- If required, you might need to get a home appraisal. If your home’s value has declined, that would mean you have yet to reach that 20 percent equity and might not be able to cancel PMI.
3. Pay down your mortgage earlier
If you have the cash to spare, put it towards extra or bigger mortgage payments — to help you hit that golden 20 percent equity figure faster.
You can prepay the principal on your loan, reducing the balance — which also helps you save on interest payments. Even $50 a month can mean a dramatic drop in your loan balance and total interest paid over the term of the loan.
To estimate the amount your mortgage balance needs to reach to be eligible for PMI cancellation, multiply your original home purchase price by 0.80.
Who this affects: Homeowners can use this method to achieve 20 percent equity more quickly. You can do so by making bigger mortgage payments, more frequent payments or by putting a lump sum towards paying down the loan. You should check with your lender as to which methods are preferable.
4. Refinance your mortgage
When mortgage rates are low, homeowners are often advised to consider refinancing. Especially in the last few years, when rates were at a historic trough of 3 percent, refinancing meant lower monthly payments and reduced interest costs. And the rise in home prices often meant a new loan could easily be below 80 percent of the home value, enabling you to eliminate PMI.
While the recent sharp climb in interest rates means it might not now be worth the effort and expense of refinancing just to get rid of PMI, it’s still something to keep in mind if you are close to the 20-percent-equity mark. If you determine that refinancing puts you over that threshold, contact your lender after the process is complete and request cancellation of your PMI.
You can also refinance into a loan that doesn’t require PMI. One way to do this is by “piggybacking” — that is, taking out a home equity loan, line of credit or other mortgage, in addition to the new primary one; this additional loan finances your down payment, getting it to the 20 percent mark.
Another option is refinancing with a government-backed USDA or VA loan, which doesn’t carry PMI, although they do charge their own fees and have some eligibility restrictions.
Refinancing works best if your home has gained substantial value since the last time you got a mortgage. For example, if you bought your house four years ago with a 10 percent down payment, and the home’s value has risen 25 percent since then, you now owe 65 percent of what the home is worth, which is less than the 80 percent threshold for PMI. Under these circumstances, you could refinance into a new loan and no longer have to pay for PMI.
With any refinancing, you’ll want to weigh the closing costs of the transaction against your potential savings from the new loan terms — especially considering the higher cost of borrowing today — and eliminating PMI.
Who this affects: This strategy works well in neighborhoods where home values have increased significantly in recent years. If your home value has declined, refinancing could have the opposite effect — you might be required to add PMI if your home equity has dropped.
Refinancing to get rid of PMI typically doesn’t work well for new homeowners. Many loans have a “seasoning requirement” that requires you to wait at least two years before you can refinance to get rid of PMI. So if your loan is less than two years old, you can ask for a PMI-canceling refi, but you’re not guaranteed to get approval. In addition, mortgages hit some of their lowest interest rates in decades two years ago, so homeowners who locked in those low rates might be financially better served by paying PMI until they reach the 20 percent equity threshold.
5. Reappraise your home
In a hot real estate market, your home equity could reach 20 percent ahead of the loan payment schedule. In this case, it might be worth paying for a new appraisal. If you’ve owned the home for at least five years, and your loan balance is no more than 80 percent of the new valuation, you can ask for PMI to be canceled. If you’ve owned the home for at least two years, your remaining mortgage balance must be no greater than 75 percent.
Appraisals for a single-family home have risen in recent years. As of early 2023, you can expect to pay between $500 and $700, depending on your area. Some lenders might be willing to accept a broker price opinion instead, which can be a substantially cheaper option than a professional appraisal. On the flip side, professional appraisals are highly regulated and provide an unbiased assessment.
Who this affects: Median home values have shot up by around 30 percent nationwide over the past couple of years, and borrowers who live in areas that are particularly red-hot might have seen their home values jump even higher. In fact, the value might have increased enough to bump you out of the PMI range. If this is the case, it’s time to talk with your lender about getting a new appraisal and potentially canceling your PMI requirement.
6. Expand or renovate your home to increase its value
While it wouldn’t make financial sense to add onto your home just to get out of paying PMI, investments you make in your home can be a path towards ditching it. If you’ve added amenities or modernized, that might have increased the value, which could also mean more equity. Improvements like a renovated kitchen, new garage doors or windows or an extra bathroom, like these can increase your home’s value (as reflected in a new appraisal) and help you cross the 20 percent equity finish line in the process.
Who this affects: If you are close to having 20 percent equity and being eligible for PMI cancellation, making significant improvements to your home could raise the home’s value enough to meet that threshold if you pay to have your home reappraised after the work is completed.
Your PMI rights under federal law
If you pay for PMI, you should be aware of the rights conferred to you by the Homeowners Protection Act. In addition to providing the mortgage payoff benchmarks to get rid of PMI, the PMI Cancellation Act also protects you against excessive PMI charges. You have the right to get rid of PMI once you’ve built up the required amount of equity in your home.
Lenders have different rules for canceling PMI, but they are required by law to provide you with a mechanism to do so. Prior to the Homeowner Protection Act’s passage, a homeowner would have little recourse if their lender refused to release them from paying PMI, even if they had enough equity in their home that the lender would be made whole if the homeowner defaulted and the lender foreclosed and seized the home.
Private mortgage insurance protects the lender from the elevated risk presented by a borrower that made a small down payment. Once the borrower has a sufficient equity cushion, the PMI will be removed.— Greg McBride, Bankrate Chief Financial Analyst
Before you sign a mortgage with PMI, ask for a clear explanation of the PMI rules and schedule. This will enable you to accurately track your progress toward ending the PMI payment. If you feel your lender is not following the rules for eliminating PMI, you can file a complaint with the Consumer Financial Protection Bureau.
Remember: You might be able to eliminate PMI when your home value rises or when you refinance the mortgage with at least 20 percent equity. But the onus is on you to request it.
Don’t drain your bank accounts to escape PMI
When it comes to how to get rid of PMI, you don’t need to be overzealous. While paying PMI each month — or as a lump sum each year — is no financial joyride, be careful not to make your finances worse by hustling to get rid of PMI.
Most financial experts agree that having some liquidity, in case of emergencies, is a smart financial move. So before you tap your savings or retirement funds to reach that 20 percent equity mark, speak with a financial adviser to make sure you’re on the right track. In particular, if you bought or refinanced your home within the past few years, you probably have a favorable interest rate. Even with the added hassle of paying for PMI, pulling your money out of high-yielding or appreciating investments to pay off a low-cost mortgage might not make financial sense.
“There seems to be a philosophical aversion to PMI on the part of many buyers that is misplaced,” says Bankrate chief financial analyst Greg McBride. “As long as you’re not taking an FHA loan, you’re not married to the PMI. You can drop it once you achieve a 20 percent equity cushion, which may only be a few years away depending on home price appreciation. But do not feel the need to use every last nickel of cash to make a down payment that avoids PMI, only to leave yourself with little in the way of financial flexibility afterwards.”
FAQs about PMI
According to Freddie Mac, the average PMI payment ranges from $30 to $70 per month for every $100,000 you borrow.
For example, if you get a$400,000 mortgage, you can expect to pay between $120 and $280 per month.
Private mortgage insurance protects your lender, not you, in the event of a default. The main benefit of PMI is that it lets you make a smaller down payment, which in a pricey housing market can let you buy a home sooner than if you decided to wait until you could afford a 20 percent down payment.