Most conventional mortgages require Private Mortgage Insurance until borrowers accumulate 20% equity in their home, typically payable as part of the regular monthly mortgage payment. Premiums tend to be added onto this amount each month.
Avoid PMI by saving for a larger down payment or refinancing to a different loan type that does not require PMI, or by quickly reaching 20% equity through principal pay off.
What is PMI?
Mortgage insurance protects lenders against potential losses should borrowers default on their payments and is often required for conventional home loans that meet Fannie Mae and Freddie Mac’s criteria (government-sponsored enterprises that purchase and sell mortgages). PMI allows lenders to accept smaller down payments from borrowers who might otherwise struggle getting financing, providing more opportunities for people looking for homeownership dreams to become reality.
Most lenders provide PMI as an ongoing monthly premium that is added to your loan payment, or an upfront premium paid at closing which increases upfront costs and may lead to higher interest rates.
Assuming your loan servicer cancels it based on your loan-to-value ratio (LTV), or by refinancing with lower rates until your LTV falls to 80%, paying your mortgage payments regularly may help eliminate or reduce PMI costs.
How much does PMI cost?
PMI costs vary based on several factors related to your loan size and other considerations, including credit score, down payment amount and debt-to-income ratio. A larger down payment usually results in lower PMI costs.
PMI premiums can either be paid as an upfront premium at closing or added monthly to your mortgage payment; the latter method is most popular and will appear on your Loan Estimate and Closing Disclosure in the “Projected Payments” section.
Lenders typically require PMI payments until you reach 20% equity or reach 80% of your home’s value, whichever occurs first. Some lenders provide workarounds to avoid PMI if you lack cash for down payments or poor credit scores by creating something known as a piggyback mortgage – this allows combining one standard loan with another FHA or VA loan and reduce or eliminate PMI altogether.
How do I get rid of PMI?
Many lenders require homeowners to pay private mortgage insurance (PMI) until their home’s value (or loan balance) reaches 80% of its original appraised value or until halfway point on mortgage amortization schedule is reached. At that point, PMI can be cancelled at homeowner request.
To convince your lender of the value of your home and cancel PMI, proof must be provided as evidence. A new appraisal may be required and may cost several hundred dollars; additionally, having no 30- or 60-day late payments and having no other liens against it such as second mortgages or home equity loans must also be considered factors.
Delaying PMI removal could lengthen your loan by years. Refinancing allows you to reduce loan-to-value ratio and qualify for better interest rates while saving monthly payments by refinancing.
Can I get rid of PMI?
Your ability to drop PMI will depend on both the level of home equity you possess and mortgage lender guidelines. Most lenders will automatically cancel PMI when your loan balance reaches 78% of either original contract sales price or appraised value (or, in refinancing situations, 80%).
Ask your lender to cancel PMI early by sending them a written request, along with any requirements they have (such as proof that there are no junior liens on your home). Making improvements that increase its value could also speed up reaching 20% equity faster; speak to your mortgage company first about whether this makes financial sense for you.
Refinancing could also help you eliminate PMI. But as this option will likely incur closing costs, make sure to run the numbers first and consult with a mortgage representative.