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Private mortgage insurance (PMI) is a common expense for homeowners. According to a 2023 Urban Institute Housing Finance Policy Center report, approximately 27.5% of 30-year fixed-rate mortgages originated in the United States from 2020 to 2022 were conventional loans with PMI.
PMI can be expensive, so it’s a great day when you can finally remove it from your monthly mortgage payment. Here’s a closer look at what PMI is, how it works, and how to get rid of it.
What is private mortgage insurance (PMI)?
Private mortgage insurance is a safeguard for lenders if you put down less than 20% when you take out a conventional loan to buy a house. This insurance policy protects the lender — not you — if you default on the loan. In other words, if you fall behind on your mortgage payments, you could still lose your home through foreclosure since PMI only insures the lender against losses.
Dig deeper: What is mortgage insurance, and how much does it cost?
When does PMI go away?
If you have a conventional loan with PMI, take comfort in knowing you won’t pay PMI forever. It goes away once you’ve paid your mortgage down to a specific point.
The Homeowners Protection Act of 1998 sets the rules governing PMI removal. This legislation applies to single-family residences closed on or after July 29, 1999. It requires mortgage lenders to automatically cancel PMI once your loan-to-value ratio reaches 78%, which means 78% of your mortgage principal is still left to pay. Another way of looking at this is that you would be scheduled to have 22% equity in your home.
So, if you bought a house for $250,000 and put 10% down ($25,000), you’ll need an extra 12% ($30,000) in home equity for a total of 22% before your lender automatically removes your PMI.
Mortgage lenders must also cancel PMI at the halfway point of your loan’s amortization schedule. For example, if you have a 30-year mortgage and it’s already past the midpoint of your loan’s amortization schedule — 15 years in this case — the lender must cancel your PMI even if your LTV ratio hasn’t reached 78% yet. This is known as final termination.
While PMI typically goes away on its own when your LTV ratio reaches 78% or when your mortgage term is at its halfway point, you may be able to get rid of PMI earlier through other methods.
Read more: Types of mortgage loans
How to get rid of PMI
PMI can add hundreds of dollars to your monthly bills. If you can’t afford to have your PMI payments eat into your budget anymore, try getting rid of it early through one of these four strategies.
Request PMI cancellation
Instead of waiting for your PMI to go away automatically, you can ask your mortgage lender or servicer to cancel it on the date your LTV ratio is scheduled to fall to 80%, or you have 20% equity in your home.
Your mortgage lender or servicer is legally required to accept your PMI cancellation request if you meet all of the following requirements:
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Your request is in writing
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You’re current on all of your payments
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There are no second mortgages, including a home equity loan or line of credit, on your home
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You can provide evidence, through an appraisal or other methods, that your home value hasn’t lost value since you bought it
Get a new appraisal
Besides paying down your loan balance, you can reach the 20% home equity benchmark faster by investing in home improvements or simply because house prices are increasing in your area. So, suppose you think your home has gained substantial value since you bought it. In that case, scheduling a professional home appraisal may be worthwhile to find its updated value and prove to your lender that you qualify for PMI cancellation.
But here’s the caveat: To cancel PMI after a new appraisal, your LTV ratio must be no more than 75% of the home’s new appraised value if you’ve only had the property for two to five years. The loan balance must be no more than 80% of the new valuation if you’ve owned the home for over five years. Also, some lenders require you to use specific appraisers, so check with the lender before spending hundreds of dollars on an appraisal.
Refinance your mortgage
If interest rates have dipped since you took out your mortgage, refinancing your mortgage could help you qualify for a lower rate and ditch your PMI — as long as the new loan balance is less than 80% of your property’s value.
Before applying for a refinance, consider the closing costs to ensure it won’t cost you more than you’ll save. Use the free Yahoo Finance mortgage calculator to help figure out whether refinancing makes financial sense.
Learn more: 5 ways to prepare for a mortgage refinance
Pay down your mortgage sooner to remove PMI
If you have the cash to spare each month, consider making larger or more frequent mortgage payments to build home equity faster. For example, you could make one extra mortgage payment per year.
Multiply your original home purchase price by 0.80 to determine the amount your mortgage balance needs to be to qualify for PMI cancellation. And if you’d rather have your lender automatically remove your PMI instead of requesting a cancellation, multiply your original home purchase price by 0.78 to see what the outstanding mortgage principal should be.
Remember, your loan must be current to be eligible for PMI removal, and you must not have any delinquent, skipped, or insufficient payments.
Read more: How to remove FHA mortgage insurance
How much does PMI cost?
PMI costs vary depending on factors like the size of your down payment, credit score, and loan term, but you can expect to pay anywhere from 0.22% to 2.25% of your loan balance annually, according to Chase Bank. Let’s say you take out a $400,000 mortgage loan — your PMI could range from $880 to $9,000 per year, or roughly $73 to $750 monthly. The PMI cost is added to your monthly mortgage payments.
Dig deeper: What does PITI mean, and how does it affect your mortgage?
Is removing PMI worth it?
Removing PMI is typically worth it because it reduces your monthly mortgage payments, saving you short-term and long-term money. Once you’ve built enough equity in your home, getting rid of PMI means you can use more funds to pay off your mortgage balance more quickly or for other financial goals rather than insurance premiums.
However, if you plan to eliminate your PMI through refinancing, know that refinance closing costs generally range from 2% to 6% of the loan amount. You’ll also need to budget for a home appraisal. According to a survey by the National Association of Realtors, the typical cost to complete an appraisal in 2023 was $500, with 86% of respondents reporting a cost of $400 or more.
So, before choosing a PMI cancellation method, you should consider how much you’ll spend versus how much you’ll save. Consider talking to a financial adviser to determine the approach that makes the most sense for your situation.
Getting rid of PMI FAQs
Can I remove PMI without refinancing?
Yes, refinancing isn’t the only way to get rid of your PMI. Other ways to remove PMI include waiting until you qualify for automatic termination, requesting PMI cancellation when you reach 20% home equity, or getting a new appraisal if your home value has shot up.
How is PMI calculated?
Your PMI payments are calculated by multiplying your total loan amount by the PMI rate. Let’s say your total loan amount is $300,000, and the PMI rate is 0.4%. In this case, your annual PMI payment is $1,200, or around $100 per month.
Is PMI permanent?
PMI is not permanent on conventional mortgage loans. If you stay current on your mortgage payments, your PMI will automatically go away once your LTV ratio reaches 78% or your mortgage term has reached the halfway point. You can also eliminate the PMI early through other methods, such as refinancing or requesting cancellation from your lender once you reach 20% equity.
What happens when PMI is removed?
Once your PMI is removed, your monthly mortgage payment will decrease since you’ll no longer be required to pay for the insurance. You could then redirect that extra savings toward other goals like paying down credit card debt or building an emergency fund.