If you couldn’t afford to make a 20% down payment when you bought your home, there’s a good chance you’re paying for private mortgage insurance.
Also called PMI, this is not insurance that covers you or your property. Instead, it’s a policy that protects the lender in case you default on your loan.
While PMI adds to the cost of your monthly mortgage payment, it allows homebuyers to achieve their property ownership goals faster and start building home equity. If you can’t save money for a larger down payment, PMI can give your preferred mortgage lender the confidence to loan you the money. Plus, you don’t have to pay PMI forever. In fact, you might be able to cancel PMI right now. Here’s how.
How to get rid of PMI
To understand how to get rid of PMI, it’s important to know why you’re paying it in the first place. Lenders prefer to see an 80/20 loan-to-value ratio, which means they are carrying 80% of the debt while the borrower has covered 20%. If you made a smaller down payment on a home -- 5%, for example -- the lender will add private mortgage insurance.
Once you’ve reached 20% equity in your home after making regular and on-time mortgage payments, you can have your PMI canceled. Below are some key ways to get rid of PMI.
Wait for PMI to be canceled automatically
A federal law known as the Homeowners Protection Act mandates that lenders must cancel PMI once the loan balance is 78% of the original value of the property. For example, if your home’s purchase price was $400,000, you’ll hit that 78% threshold once the outstanding mortgage balance is $312,000. This is the easy route to avoid making any more PMI payments: Just wait until your lender does the work.
Request PMI cancellation after conventional loan balance drops to 80%
You don’t have to wait for that 78% number to kick in. Instead, you can request cancellation of PMI a bit earlier, when your outstanding loan balance is 80% of the original value. With that same $400,000 property mentioned above, this means that as soon as your principal balance is $320,000, you can officially request PMI cancellation. Your loan servicer is obligated to grant it as long as your loan is in good standing.
Get a new appraised value of your home
Housing prices have soared over the past three years, which is great news for anyone who already owns a home (and terrible news for prospective buyers). Data from Freddie Mac shows that housing prices increased by more than 11% in 2020 and 18% in 2021. If property values have been soaring in your area, it may be worth asking your lender for a new appraisal.
You’ll need to pay for an appraisal, but the investment -- typically in the $500 range -- can be beneficial. If your property value has skyrocketed, so has the equity in your home, so you may be able to finally wave goodbye to PMI forever.
Upgrade your property to increase home value
When you invest in your property by remodeling your kitchen, adding an in-law suite or finishing a basement, those upgrades can increase your property value.
However, you shouldn’t spend all that money solely to get rid of your PMI premium. PMI costs up to 1.5% of your yearly principal loan balance, so it’s safe to say that the cost of remodeling your bathroom is going to be quite a bit higher than your mortgage insurance premiums. It only makes sense to make a big investment in your home if you’re planning to stay there for the foreseeable future to enjoy it. The opportunity to get rid of PMI should be a by-product of your renovation, not the reason for it.
Make sure you’re keeping note of every piece of the project. It’s likely that your lender and appraiser will ask for a detailed list of the enhancements.
Borrower-paid mortgage insurance versus lender-paid mortgage insurance
Borrower-paid mortgage insurance is exactly what it sounds like: You, as the borrower, are responsible for paying for private mortgage insurance. In some cases, you’ll pay a lump sum and in others, you’ll pay a monthly fee. Either way, the cost falls on your shoulders.
Lender-paid mortgage insurance is a bit different, but don’t be fooled by the name: You’re still paying a price. LPMI includes the cost of insuring your loan in the interest rate. The rate, which is typically between ¼ and ½ of a point higher, applies to the life of the loan. So, unless you sell the home or refinance your mortgage, you’re stuck paying a higher rate until you pay off the loan.
What happens after you get rid of PMI?
To cancel private mortgage insurance, you’ll likely need to submit a written request to your mortgage servicer. Depending on the company, you may be able to do it online, but be sure to ask if you need to send a physical notice in the mail. If you meet all the conditions for PMI cancellation, you’ll likely receive a confirmation of the end date in the mail.
Once those PMI premiums disappear from your monthly mortgage payment, you can focus on what to do with that chunk of money. Since you’ve already been budgeting for that set amount, it can be wise to continue making the same payment with the extra funds going toward your principal to accelerate your payoff timeline.
However, there are plenty of other options for the money you’re now pocketing. If you’re trying to save money for a child’s college costs via a 529 plan, consider increasing your contributions. If you’re behind on saving for retirement, focus on maximizing your annual IRA contributions. If you need to build a bigger emergency fund, think about opening a high-yield savings account with a better interest rate.
FAQs
Private mortgage insurance is designed to protect the lender if the borrower defaults on the loan. Mortgage protection insurance, on the other hand, is an optional type of life insurance coverage that can help other family members afford to stay in the home if the primary borrower dies or is disabled.
The biggest difference between mortgage insurance on conventional loans versus mortgage insurance on a Federal Housing Administration, or FHA, loan is the ability to cancel after accumulating 20% in home equity. The vast majority of FHA mortgage holders are required to pay for mortgage insurance for the entire loan term. Additionally, FHA loans have two premiums: an upfront mortgage insurance premium that costs 1.75% of the loan amount and a recurring annual premium.
According to Freddie Mac, you will pay somewhere between $30 and $70 in monthly payments for every $100,000 you borrow. There are two main factors that will impact the cost of PMI: your loan-to-value ratio and your credit score. Generally speaking, a lower down payment (which creates a higher loan-to-value ratio) and a lower credit score make you a more risky borrower. That translates to a more expensive PMI payment.
You can remove PMI as soon as the outstanding balance on your mortgage is 80% of the original buying price. Your mortgage lender is required to grant your request for eliminating PMI as long as you submit it in writing, you have a good payment history and you don’t have any other outstanding liens against the property.
If you’re taking out a conventional loan, you can avoid PMI payments by making a 20% down payment on your home. You can also explore no-PMI loans, which are available at select loan servicers. While you’ll benefit from the convenience of just one payment, it’s important to understand that no-PMI loans typically come with higher interest rates.
Home equity loans allow you to leverage your home equity to borrow funds to pay for home improvements or other expenses, or to consolidate debt. Most lenders require you to have at least 20% equity in your home to qualify for a home equity loan, also considered a second mortgage, so you would no longer be required to pay for PMI at that point. However, because some loan servicers allow you to take out a home equity loan with less than 20% equity, there’s a small chance you could still be making PMI payments when you want to borrow.