How to Get Rid of PMI, or Private Mortgage Insurance

PMI, or private mortgage insurance, is unavoidable for some purchasers. This coverage can add hundreds of dollars to your monthly mortgage payment — and in the event of default, it benefits the lender rather than you. How to get rid of PMI is a common question.

However, there is a silver lining: there are numerous options for getting rid of PMI when your home equity grows. The federal Homeowners Protection Act gives you two options for getting rid of PMI from your mortgage. For example, when you reach 80 percent equity, you can request that PMI be withdrawn “automatically” or “finally.”

You can also get rid of PMI if your house value increases enough or you refinance with at least 20% equity. Lenders may have additional PMI removal restrictions.

What is PMI, or Private Mortgage Insurance?

PMI is a sort of mortgage insurance that protects the lender.

Buyers who utilize a traditional mortgage with less than 20% down payment typically must obtain private mortgage insurance. This is an annual fee ranging from 0.3 to 1.5 percent of your mortgage. According to Freddie Mac, monthly PMI payments range from $30 to $70 per $100,000 of loan outstanding. The amount you pay depends on your credit score and down payment. Since your PMI premium is based on the size of your loan, it will drop as you pay it down.

Bankrate’s chief financial analyst, Greg McBride, CFA, believes private mortgage insurance shields lenders from risky borrowers with low down payments. “PMI will be withdrawn after the borrower has enough equity cushion.”

PMI isn’t required for all mortgages with less than 20% down. For example, FHA and VA loans with low or no down payment have distinct regulations. If you want to avoid paying PMI, private lenders may offer low-down-payment conventional loans with higher interest rates.

How To Get Rid of PMI – Your 4 Options

Here are four options for homeowners eager to save money each month by losing those costly PMI payments.

Option 1: Pay down your mortgage for automatic or final termination of PMI

When one of two situations happens, your mortgage lender or servicer is obligated under the HPA to remove your PMI:

1. If your mortgage total reaches 78 percent of the original purchase price, the provider must immediately cancel PMI if you are in good standing and haven’t missed any scheduled mortgage payments.
2. At the halfway point of your amortization schedule, the lender or servicer must likewise stop paying PMI. The midpoint of a 30-year debt, for example, would be after 15 years. Even if your mortgage total hasn’t yet hit 78 percent of the home’s initial value, the lender must eliminate the PMI if you’ve been current on your payments. This is referred to as “final termination.”

Who is affected by this: People with traditional mortgages who have paid according to their original payment schedules and have reached the milestones of 78 percent equity or the midway point in time can get rid of PMI in this method. You must be current on your payments to be eligible.

Option 2: Request PMI cancellation when mortgage balance reaches 80 percent

Rather than waiting for automatic cancellation, you can request cancellation if your loan balance exceeds 80% of the home’s original value. You may find the date you’ll reach 80% on your PMI disclosure form or ask your loan servicer for it.

Extra payments can get you there faster if you have extra funds. Prepaying your loan principal reduces the sum, allowing you to develop equity faster and save on interest. Even $50 a month can significantly reduce your loan debt and total interest paid.

Some people prefer to pay a lump sum or make an extra mortgage payment each year. That will get you to 20% equity faster. To calculate your eligibility for PMI cancellation, multiply your initial house purchase price by 0.80.

This option is available to homeowners that have 20% equity. To cancel PMI, you must also:

• Send your lender a written PMI cancellation request.
• Maintain a strong payment history on your mortgage.
• Affirm that there are no other liens on the property.
• You may need a house appraisal. You may not be able to cancel PMI if your house value has decreased.

Option 3: Refinance to get rid of PMI

When mortgage rates are low, as they are right now, you may want to consider refinancing your mortgage to save money on interest or lower your monthly payments. Simultaneously, if your new mortgage balance is less than 80% of the home’s value, you may be able to eliminate PMI. It’s a double dose of cost-cutting.

The refinancing strategy works if the value of your home has increased significantly since the last time you obtained a mortgage. For example, if you purchased your home four years ago with a 10% down payment and the home’s value has increased 15% since then, you now owe less than 80% of the home’s value. Under these conditions, you can refinance into a new loan without paying PMI.

With any refinance, you should weigh the transaction’s closing costs against the potential savings from new loan terms and the elimination of PMI.

Who this affects: This strategy works well in areas where home values are rising. If your home’s value has dropped, you may be compelled to pay PMI if you refinance.

Refinancing to eliminate PMI is typically ineffective for first-time homebuyers. Many loans have a “seasoning requirement,” which means you must wait at least two years before refinancing to remove PMI. You can request a PMI-cancelling refi if your loan is less than two years old, but approval is not assured.

Option 4: Reappraise your home if it has gained value

In a booming real estate market, your home equity could grow by 20% faster than expected. It may be worthwhile to pay for a new appraisal. You can request that PMI be removed if you’ve owned the house for at least five years and your loan balance is less than 80% of the new value. Your remaining mortgage balance must be no more than 75% if you’ve owned the house for at least two years.

Appraisals can range from $450 to $600, depending on your location. Some lenders may be willing to accept a broker pricing opinion instead of a professional assessment, which can be a far less expensive choice.

Who this affects: Borrowers in hot housing markets may have seen their home values rise dramatically in recent years. In fact, the value may have risen to the point where you are no longer in the PMI range. If this is the case, talk to your lender about having a new appraisal and maybe getting rid of your PMI need.

If you’ve added amenities or refurbished your property, the value may have improved, resulting in additional equity. Common additions, such as an extra room or a pool, can increase the market value of your property. You can kick PMI to the curb if you reach the 20 percent equity mark in the process.

Federal law protects your PMI Rights

Homeowners should be aware of their rights under the Homeowners Protection Act if they pay for PMI. The PMI Cancellation Act is a federal law that protects you from exorbitant PMI payments. Once you’ve accumulated the minimum amount of equity in your house, you have the right to be free of PMI. Lenders have varying policies for canceling PMI, but they must allow you to do so.

Request a detailed explanation of the PMI rules and timeline before signing a mortgage with PMI. This will allow you to keep track of your progress toward paying off your PMI. You can file a complaint with the Consumer Financial Protection Bureau if you believe your lender is not following the guidelines for removing PMI.

Next steps: Don’t empty your bank accounts in order to avoid PMI.

While paying PMI on a monthly basis — or in one huge amount each year — isn’t fun, homeowners should be careful not to make matters worse by rushing to get rid of it.

Most financial gurus agree that having some cash on hand in case of an emergency is a good idea. So, before you dip into your savings or retirement accounts to reach that 20% equity mark, consult a financial advisor to ensure you’re on the correct route.

“It appears that many purchasers have a philosophical antipathy to Private Mortgage Insurance that is incorrect,” McBride adds. “You’re not married to the PMI as long as you’re not taking out an FHA loan.” You can get rid of it if you’ve built up a 20% equity cushion, which could happen in a few years depending on home price appreciation. But don’t feel compelled to spend every last cent on a down payment to avoid PMI, only to be left with little financial flexibility afterwards.”

Image via Flickr/gotcredit