How to remove PMI from your mortgage
Once you reach 20% equity in your home, you can ask your lender to cancel PMI or refinance to a loan without it. (iStock)
For many homebuyers, private mortgage insurance is an unavoidable expense. PMI protects your lender in case you default on your mortgage, and it typically increases your monthly mortgage payment.
The good news is that you don’t have to pay for PMI forever. You can remove PMI from your home loan in a few different ways, such as refinancing. With today’s historically low mortgage interest rates, now might be a good time for you to lock in a lower rate and save hundreds of dollars by removing PMI.
What is PMI?
Private mortgage insurance, commonly referred to as PMI, is a type of insurance that protects your lender in the event that you can’t make your monthly payments. It’s typically required on conventional loans when you make a down payment that’s less than 20%. You’ll make monthly PMI payments until you reach 20% equity in your home. When that happens, you can ask your lender to drop private mortgage insurance.
Other types of loans have mortgage insurance, too. For example, FHA loans (administered by the Federal Housing Administration) charge a mortgage insurance premium, often called MIP, that you pay when you close on your loan and every year afterward as long as you have the loan.
While PMI is intended to protect the lender, it does help homebuyers indirectly. Because of the security PMI provides, you’re often able to buy a home with as little as 3% down on a conventional loan. About 40% of all mortgages through government-sponsored entities Fannie Mae and Freddie Mac carry private mortgage insurance, according to the Urban Institute.
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How much does PMI cost?
Private mortgage insurance is typically charged as a percentage of the loan amount, which generally ranges from 0.5% to 1.5% per year. This equates to a PMI rate of $1,000 to $3,000 on a $200,000 mortgage. The specific cost of PMI depends on things like:
- The amount of your down payment
- Your credit history
- The type of loan you choose
- The term of your loan
Usually, you’ll pay your PMI premium each month, with the cost included in the total amount you send your lender. This is on top of the principal and interest payment you make, and part of the taxes and fees. But some lenders may offer a single, upfront private mortgage insurance premium that you pay at closing. In some cases, you might be offered an upfront premium along with monthly premiums.
How to remove PMI
If you’re ready to finish paying PMI on a conventional loan, you can cancel it in a few different ways. The methods below apply only to private mortgage insurance on conventional loans. The rules are different for mortgage insurance on government loans, like FHA loans.
Wait for PMI to be automatically canceled
By law, your lender must automatically cancel your private mortgage insurance once you reach 22% equity in your home, based on the payment schedule of your loan and the original home value. You’ll need to be completely up to date on your payments for this to happen.
Your PMI will also be automatically canceled once your loan reaches its midpoint — for example, after 15 years of a 30-year mortgage. This is true even if you haven’t hit the 22% home equity mark.
Request PMI cancellation
You can request PMI termination from your lender once you reach 20% equity in your home through your monthly mortgage payment, based on the original value of your home when you took out the loan. Your lender is required to tell you when this is scheduled to happen.
You must make your request in writing and have a good payment history (all payments must be current). Your lender may ask you to show that your home hasn’t lost value, and also may require that there be no liens or second mortgages on the property.
Get a new home appraisal
Rising home values can help you reach the magic 20% equity mark faster. Since equity is the difference between what you owe on your home and what it’s worth, any home appreciation will increase that spread. Your lender may take this into account and approve a request to cancel PMI based on your home’s current value but will likely require a professional appraisal to verify your home’s worth. Your new appraised value will go into the equity calculation.
Refinance to remove PMI
You can also refinance your loan and take out a new mortgage without PMI. You’ll need to have 20% equity in your home, of course. As part of a mortgage refinance, your lender will typically order a new appraisal that’ll help you take advantage of home price appreciation. Just be aware that if you’re planning on a cash-out refinance, any money you take out of the home will reduce the total amount of equity you have.
Credible lets you compare mortgage rates to see if refinancing makes sense for you.
Can you avoid PMI?
While private mortgage insurance can be a big help for borrowers buying a home, there are ways to avoid paying PMI altogether. Here are a few:
Put 20% or more down
The easiest way to avoid PMI is to make a down payment of 20% or more on your home. This is easier said than done, especially if you’re buying your first home. But you can factor this into your budget, save up more money or buy a less expensive home if you want to steer clear of PMI.
No-PMI mortgages
Some lenders offer low-down-payment mortgages without PMI. This might be part of a first-time homebuyer program or a special program with its own qualification requirements. It’s worth asking about. Military service members or veterans may also consider a VA loan, which doesn’t carry mortgage insurance, though you’ll usually be required to pay an upfront fee at closing.
PMI exceptions
PMI only applies to conventional loans. Government-backed loans follow their own rules. If you’re a military service member or veteran, you may want to look into a VA loan, which doesn’t require mortgage insurance. FHA loans and USDA loans require mortgage insurance, which can’t be canceled. You’ll have to refinance your loan to a different type to get out of it.
Know your PMI rights
Most of the rules surrounding private mortgage insurance were set by the federal Homeowners Protection Act of 1998. They apply to all loans issued on or after July 29, 1999.
The law gives homeowners rights, including the automatic PMI cancellation mentioned earlier. Lenders are also required to tell you about canceling PMI at the mortgage closing and every year after that. They must also give you a phone number you can call to inquire about PMI cancellation. When your PMI is canceled, they have to send you written notice of it and inform you that you don’t owe any more premiums.
Before agreeing to a conventional mortgage, ask your loan officer for a detailed explanation of the private mortgage insurance requirements, how it will be paid and any other rules that apply. If you don’t believe your lender is following the rules for removing PMI, you can submit a complaint to the federal Consumer Financial Protection Bureau.
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