Does a Home Equity Loan Affect Private Mortgage Insurance?

The cost of your private mortgage insurance can be eliminated with enough home equity.

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If you bought your home with a large down payment or paid down your mortgage enough, you may not need to pay for private mortgage insurance. You're required to pay PMI only if your loan-to-value ratio -- a measure of your loan balance compared to your home's value -- is above 80%. It's possible that taking out a home equity loan could increase your LTV ratio beyond that threshold. And if your LTV does increase, you'll have to pay PMI for a longer period of time to reach the 20% threshold, which means you'll pay more over the course of the mortgage loan. Here's everything you need to know about how a home equity loan could affect private mortgage insurance.

What is a home equity loan?

A home equity loan allows homeowners to borrow against the equity they've built in their home without the need to sell or refinance. When you get a home equity loan, the lender will pay you a lump sum that you will start repaying at a fixed interest rate per the terms of the loan. 

Opting for a home equity loan can be beneficial if you need cash for expenses such as renovations or unexpected emergencies. Still, you should evaluate your needs and circumstances before committing to a loan. This type of loan tends to have lower interest rates than unsecured debts, such as credit cards or personal loans, but higher interest rates than your mortgage. Because your home is collateral, you could face foreclosure if you default. 

What is private mortgage insurance?

Private mortgage insurance allows home buyers to purchase a home with a conventional mortgage loan and less than a 20% down payment. PMI protects the lender from the borrower defaulting on the loan because it's assumed you're at higher risk of defaulting on your mortgage if you cannot make a 20% down payment or greater. 

What is the loan-to-value ratio?

The loan-to-value ratio measures how much you're borrowing for a home compared to its appraised value, and a low LTV ratio can help you qualify for a lower interest rate. The LTV ratio is calculated by dividing the loan amount by the property's appraised value, expressed as a percentage. Keeping the LTV ratio below 80% is generally advised to qualify for the lowest possible interest rate. If the ratio is above 80%, the borrower may be required to get private mortgage insurance (PMI). You can also decrease this ratio by making a larger down payment or searching for a more affordable house.

How home equity loans can affect PMI

A home equity loan will increase your LTV if you're still paying PMI. That's because it will take your principal balance even longer to drop to 80% if you submit a cancellation request or 78% when PMI is automatically canceled. If the lender has already canceled your PMI, you're in the clear. Your lender cannot reinstate PMI if it has already been canceled. 

How to remove private mortgage insurance

There are a few ways to remove PMI from your loan, including methods outlined in the federal Homeowners Protection Act.

  • Automatic or "final" PMI termination at specific home equity intervals
  • Request a PMI removal when you reach 20% home equity

There are other ways to remove the need for PMI as well. For example, if you are able to refinance your mortgage for a sufficiently lower rate, that might bring your new loan balance to below 80%. In addition, if your home has appreciated in value since you bought it, or if you have made significant renovations that increased its value, that might push your equity beyond the threshold where PMI is needed. Determining this will likely require a new appraisal, though.

Correction, 7:30 a.m. PT Jan. 25: An earlier version of this article stated that a home equity loan would not incur any new PMI charges or affect a PMI payment requirement. The article has been corrected to clarify that a home equity loan could increase a borrower's loan-to-interest ratio, which would in turn mean they would have to pay PMI for a longer period of time, which would increase overall costs. In addition, an earlier version of the article incorrectly stated that a home equity loan allows homeowners to borrow from the value of their home. This has been corrected to clarify that a home equity loan allows a homeowner to borrow against equity they have in their home -- not from the home's overall value. Finally, an earlier version stated that there were two ways to remove private mortgage insurance. This has been corrected to clarify that there are in fact more than two ways, with additional details about each.