Borrowers wondering how to get rid of PMI, or private mortgage insurance, may be surprised to learn there are multiple ways to cancel it. PMI is usually required when a buyer puts down less than 20% on a home.
While this unique type of insurance helps buyers qualify for financing, it adds a fee to their monthly mortgage payment. If you currently pay for private mortgage insurance, familiarizing yourself with the multiple ways to get rid of PMI can help you lower your payment and put money back into your pocket.
What is PMI on a mortgage?
Private mortgage insurance (PMI) is an insurance policy that most conventional (non-government) loan borrowers must pay for if they put down less than 20% of a home’s purchase price when buying a house.
Even though homeowners pay for PMI, this unique insurance coverage actually protects lenders by guaranteeing they get paid if the borrower defaults on the loan. Because of this guarantee, banks and mortgage companies are willing to lend to borrowers who make small down payments.
How much does PMI cost?
According to Freddie Mac, homeowners generally pay between $30 and $70 a month for every $100,000 they borrow. So, the monthly PMI on a $400,000 loan would range from $120 to $280. The exact cost is based on the loan amount, down payment, loan-to-value (LTV) ratio, and the buyer’s credit score.
Borrowers typically pay for PMI in their monthly mortgage payment unless they choose to pay upfront or have a loan with lender-paid PMI — which usually will carry a higher interest rate. Because of this added expense, homebuyers often seek ways to get rid of PMI.
How to get rid of PMI: 4 options to consider
Fortunately for homeowners, PMI payments don’t last forever. When a borrower has enough equity — the value of their home minus the amount they owe — they can stop paying for PMI. Here’s a look at how to get rid of PMI on conventional loans.
1. Wait for PMI to drop off automatically
Conventional loans have two milestones at which PMI premiums automatically stop, as outlined in the Homeowners Protection Act (HPA), a federal law that provides homeowners rights regarding PMI. Under the law, lenders and loan servicers must end PMI either through Automatic PMI termination or Final PMI termination.
- Automatic PMI termination: PMI payments automatically end when your principal balance is scheduled to reach 78% of the original home value — meaning when you have 22% equity in the home.
- Final PMI termination: PMI payments automatically end halfway through the loan’s amortization schedule. For example, if you have a 30-year mortgage, your servicer will cancel PMI after you reach the 15-year milestone. This event will trigger the cancellation regardless of the home’s value or your loan balance. So, it benefits borrowers who have paid their loans consistently but failed to reach 22% equity, perhaps due to an interest-only period or temporary forbearance.
For these termination events to occur, borrowers must be current on their loan payments. If you’ve paid your mortgage as agreed, one of these events — whichever occurs first — will automatically trigger PMI termination.
2. Request PMI cancellation
Homeowners don’t have to wait for PMI to drop off their loan automatically. The HPA gives borrowers the right to request PMI cancellation on the date their loan is scheduled to reach 80% of the original property value or purchase price — whichever is lower. Your lender or servicer will provide the specific date on a PMI disclosure form at closing.
Requesting PMI cancellation instead of waiting for it to drop automatically can help buyers who have reduced their principal balance ahead of schedule by making additional payments. However, if your home value has fallen below the original appraisal, you may not qualify for the cancellation.
To request PMI cancellation, borrowers must follow specific steps stated in the HPA and any additional lender guidelines, which include:
- Make sure your loan is current and you have a good payment history.
- Put your request in writing.
- If requested by your lender, confirm that you have no additional loans on the property, such as a home equity loan or home equity line of credit (HELOC).
- Verify the value of your home with a new appraisal if requested by your lender.
3. Refinance to get rid of PMI
Another strategy you can use is refinancing to get rid of PMI — as long as you have enough equity to avoid paying PMI on the new loan. For example, if property values have jumped since you purchased the home and you’ve paid down some of the principal, the LTV ratio on the new loan may be below 80%. Also, if you have a mortgage with lender-paid PMI, refinancing can lower your rate and save you money over the remainder of your loan.
Refinancing to get rid of PMI comes with some drawbacks, though. First, you’ll pay closing costs on the refinance loan, so be sure to crunch the numbers with a refinance calculator to see if the amount you’ll save will outweigh the expense of refinancing. Secondly, if interest rates have risen since you took out the loan, you may be trading your PMI payments for higher interest. Also, keep in mind that some loans may have seasoning requirements, meaning you can’t refinance before a specific time frame.
4. Get a new home appraisal
If your home value has increased significantly since taking out your mortgage, either due to changes in the market or because you’ve made improvements to your house, you could get a new home appraisal to get rid of PMI. With a higher property value, you may have enough equity in the house, and your lender may be willing to drop PMI.
While a new appraisal will run a few hundred dollars, the cost is usually warranted if it means reducing your monthly payment for the remainder of the loan. Although, if you bought your home recently and home values have not moved, getting a new appraisal to get rid of PMI may not be worth the cost.
How to get rid of PMI on an FHA loan
Government loans also carry mortgage insurance or similar fees that offset the risk that lenders take when lending to borrowers without substantial down payments. For example, FHA loans, which require only a 3.5% down payment, have both an upfront mortgage insurance premium and an annual premium spread across the monthly mortgage payments. The mortgage insurance premiums on FHA loans are paid to the Federal Housing Administration instead of private insurance companies, as is the case with PMI.
Unlike conventional loans, the mortgage insurance on FHA loans lasts the entire life of the mortgage, except for borrowers who put down at least 10% when purchasing. In that case, mortgage insurance premiums can end after 11 years, depending on the loan amount.
One way to end mortgage insurance on FHA loans is to refinance into a conventional loan, provided the LTV ratio will be 80% or below.
FAQs about getting rid of PMI
Do you have to refinance to get rid of PMI?
Refinancing to get rid of PMI is one approach borrowers can take, but it’s not the only option. Conventional loans have built-in events that automatically trigger PMI termination, and borrowers can also request PMI cancellation when they have at least 20% equity in the home.
When can you get rid of PMI?
Typically, conventional loan borrowers can get rid of PMI when their loan principal balance is 80% of the original home value. Even if you don’t cancel PMI, lenders will automatically drop it when your principal balance is due to reach 78% of the original value or after you’ve made half of the scheduled loan payments — whichever occurs sooner.
Can you get rid of PMI on an FHA loan?
FHA borrowers pay mortgage insurance to the Federal Housing Administration rather than PMI to private companies. Premiums last throughout the life of the loan, except for borrowers putting more than 10% down, who pay FHA mortgage insurance for 11 years only.
Can you get rid of PMI if your home value increases?
Yes, there are two ways to get rid of PMI if your home value has increased since taking out your loan. You could order a new home appraisal and request your lender cancel PMI based on the new value. Or, you can refinance your home with a new loan to get rid of PMI payments early.
Keep in mind that your loan will need to meet your loan servicer’s guidelines to qualify for canceling PMI.
Ready to say goodbye to PMI? A local Finance of America Mortgage Advisor can help you explore your loan options.