Some homebuyers just can’t avoid PMI, or private mortgage insurance. this coverage can add hundreds of dollars to your monthly mortgage payment, and benefits your lender, not you, in the event of a default.
However, there is a silver lining: as your home’s equity increases, there are several paths to get rid of pmi.
what is pmi or private mortgage insurance?
pmi is a type of mortgage insurance that protects the lender in the event of default on your mortgage.
Homebuyers using a conventional mortgage with a down payment of less than 20 percent generally must obtain private mortgage insurance. this is an additional annual cost: about 0.3 percent to 1.5 percent of your mortgage balance, though it can vary.
according to freddie mac, each month, borrowers can typically pay between $30 and $70 in pmi for every $100,000 of loan principal. How much you pay depends on your credit score, your mortgage and loan term, and the amount of your down payment. Your PMI is recalculated each year based on the current size of your loan balance, so your premium will decrease as you pay off the loan.
“private mortgage insurance protects the lender from the high risk posed by a borrower who made a small down payment,” says greg mcbride, cfa, chief financial analyst at bankrate. “once the borrower has sufficient equity capital, the pmi will be eliminated.”
pmi does not apply to all mortgages with down payments of less than 20 percent. For example, government-backed FHA loans and VA loans with low or no down payment requirements have different rules. Private lenders sometimes offer conventional loans with small down payments that don’t require PMI; however, there are usually other costs, such as a higher interest rate, to offset the increased risk.
4 ways to get rid of PMI
1. pay your mortgage for automatic or final termination of pmi
The federal Homeowners Protection Act gives you the right to remove the PMI from your mortgage loan in two ways:
- You can get “automatic” or “final” pmi termination at specific home equity milestones.
- You can request pmi removal when you reach 20 percent of value accumulated from the home.
The lender or servicer must automatically terminate pmi when your mortgage balance reaches 78 percent of the original purchase price; In other words, when its loan-to-value (LTV) ratio drops to 78 percent. this as long as you are up to date and have not fallen behind on any mortgage payments.
The manager should also stop the pmi at the midpoint of its amortization schedule. For example, if you have a 30-year loan, the midpoint would be after 15 years. if you have a 15-year loan, the midpoint is 7.5 years.
The servicer must cancel the pmi at that time, depending on whether you’ve been current on your payments, even if your mortgage balance hasn’t yet reached 78 percent of the home’s original value. this is known as a final termination.
Who does this affect: Removing the pmi this way works for people with conventional mortgages who have paid according to their original payment schedules and have reached the 22 percent principal milestones or the midpoint in time . to be eligible, you must be current on your payments.
2. apply for pmi cancellation when the mortgage balance reaches 80 percent
Instead of waiting for automatic cancellation, you have the right to request that the servicer cancel PMI once your loan balance reaches 80 percent of the home’s original value. If you’re making payments on schedule, you can find the date you’ll get 80 percent on your PMI disclosure form (or from your servicer).
If you have money to spare, you can get there faster by making additional payments.
You can prepay the principal on your loan, reducing your balance, helping you build principal faster and 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.
Some borrowers choose to apply a lump sum to their principal or even make an additional mortgage payment per year. that will get you to the 20 percent equity level faster. To estimate how much your mortgage balance must reach to be eligible for PMI cancellation, multiply your home’s original purchase price by 0.80.
Who does this apply to: Homeowners can use this method once they’ve reached 20 percent equity. you must also 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 the requirements of other lenders, such as having no other liens on the home (ie, a second mortgage).
- if necessary, you may need to get a home appraisal. If your home’s value has gone down, that would mean you still have to reach that 20 percent equity and you may not be able to pay off PMI.
3. refinance to get rid of pmi
When mortgage rates are low, you may consider refinancing your mortgage to save on interest costs or lower your monthly payments. At the same time, refinancing could allow you to eliminate PMI if your new mortgage balance is less than 80 percent of the home’s value. it’s a double dose of savings.
The refinancing tactic works if your home has gained substantial value since you last took out a mortgage. For example, if you bought your home four years ago with a 10 percent down payment, and the home’s value has increased 15 percent since then, you now owe less than 80 percent of the home’s value. Under these circumstances, you can refinance into a new loan without having to pay PMI.
With any refinance, you’ll want to weigh your closing costs against the potential savings from the new loan terms and the elimination of pmi.
who does this affect: This strategy works well in neighborhoods where home values are on the rise. If your home’s value has decreased, refinancing could have the opposite effect: You may need to add PMI if your home’s value has decreased.
Refinancing to get rid of pmi generally doesn’t work well for new homeowners. Many loans have a “preparation requirement” that requires you to wait at least two years before you can refinance to get rid of PMI. therefore, if your loan is less than two years old, you can apply for a payoff refinance from pmi, but approval is not guaranteed.
4. revalue your house if it has gained value
In a dynamic housing market, your home equity could reach 20% before your loan payment due date. 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 isn’t more than 80 percent of the new valuation, you can request to have PMI canceled. if you’ve owned the home for at least two years, the remaining balance on your mortgage should be no more than 75 percent.
Single-family home appraisals typically cost between $250 and $500, depending on the area. Some lenders may be willing to accept the opinion of a price broker, which can be a substantially cheaper option than a professional appraisal. On the other hand, professional appraisals are highly regulated and provide an unbiased evaluation.
Who this affects: Borrowers who live in areas that are particularly red-hot may have seen their home values skyrocket in the last two years. in fact, the value could have increased enough to take it out of the pmi range. If this is the case, it’s time to talk to your lender about getting a new appraisal and possibly canceling your PMI requirement.
if you added services or renovated your house, that could also have increased the value, which could also mean more equity. Whether it’s a renovated kitchen, replacement windows, or an extra room, common updates like these can increase the value of your home. if it crosses the 20 percent equity finish line in the process, then it can kick pmi to the curb.
your pmi rights under federal law
Homeowners who pay PMI should know their rights under the Homeowners Protection Act. This federal law, also known as the PMI Cancellation Law, protects you from excessive PMI charges. You are entitled to get rid of PMI once you have built up the required amount of equity in your home. lenders have different rules for canceling pmi, but they must allow you to do so.
before you sign a mortgage with pmi, ask for a clear explanation of pmi’s rules and schedule. This will allow you to accurately track your progress toward finalizing your PMI payment. If you think your lender isn’t following the rules for removing PMI, you can file a complaint with the Consumer Financial Protection Bureau.
Remember: You may also be able to remove PMI in some other circumstances, such as when your home value increases or when you refinance your mortgage with at least 20 percent equity.
don’t empty your bank accounts to escape pmi
When it comes to how to get rid of pmi, you don’t need to be too enthusiastic. While paying PMI each month, or as a lump sum each year, isn’t a financial joy ride, be careful not to make your finances worse by rushing to get rid of PMI.
Most financial experts agree that having some liquidity, in case of emergencies, is a smart financial decision. So before you tap into your savings or retirement funds to hit that 20 percent home mark, talk to a financial advisor to make sure you’re on the right track.
“There seems to be a philosophical aversion to the pmi on the part of many buyers that is misplaced,” says mcbride. “As long as he’s not taking an fha loan, he’s not married to pmi. you can leave once you achieve a 20 percent equity cushion, which may only take a few years depending on home price appreciation. But don’t feel the need to use every penny of cash to make a pmi-avoidable down payment, only to be left with little financial flexibility later.”
frequently asked questions about pmi
how much is the pmi?
what are the benefits of getting pmi?
are there different types of pmi?
with additional reporting by jeanne lee
See also: Condo Master Insurance: A Master Guide