Assuming you can afford it, the ideal way to avoid Private Mortgage Insurance (PMI) is making at least 20% down payment on your home purchase; conventional loans require PMI if less is put down than this amount.
Your monthly mortgage payments typically include the premium. You can find it on your Loan Estimate and Closing Disclosure documents under Projected Payments; alternatively, there may also be an upfront premium payable at closing.
What is PMI?
PMI, or private mortgage insurance, is required by certain conventional loan lenders in order for you to qualify. Its purpose is to protect lenders in case of default by protecting against losses should your payments go into default.
At closing, you will generally pay an upfront premium as part of your closing costs. Additionally, monthly premium payments can also be added directly into your mortgage payment.
Your loan-to-value ratio determines whether or not PMI is necessary. This ratio measures how much of a balance remains on your mortgage compared to either its purchase price, or appraised value at time of loan origination or refinancing.
PMI typically ends when your loan-to-value (LTV) reaches 80%, but you may require a new appraisal for verification – an expense which may cost several hundred dollars or more. You could avoid it altogether by saving up for a 20% down payment home purchase.
How much does PMI cost?
PMI costs vary based on your down payment size and credit score, with monthly installments typically paid as part of mortgage payments. According to estimates by Urban Institute and Freddie Mac, homeowners with good credit should expect to pay approximately $30-70 per $100,000 loan every month; those with less than perfect credit could potentially incur much higher costs.
Make a larger down payment or improve your credit before applying for a mortgage and you could forgo PMI altogether. Or use what’s known as a piggyback mortgage – an arrangement wherein two smaller loans cover different percentages of the home purchase cost simultaneously – ask lenders about pricing details before making your decision.
If PMI cannot be avoided, federal law mandates that lenders cancel it once your loan balance reaches 78% of original home value or you reach 20% equity and request cancellation.
How do I avoid PMI?
One way to avoid mortgage insurance (PMI) payments is to save for a down payment well in advance. Another strategy could be making significant upgrades that increase home values; this could help meet the 20% threshold needed to cancel PMI and also save you money with reduced mortgage interest costs.
If you have already made payments of at least 80% and achieved 20% equity, you can request that your lender cancel PMI. Usually this requires paying for a new appraisal to verify the current home value doesn’t fall below that estimated by original appraiser.
Refinancing can help eliminate PMI payments, though it will incur closing costs and might increase your mortgage rate. Before refinancing, ensure it makes financial sense by carefully balancing savings versus costs to ensure this decision makes a sensible financial choice for you.
How do I get rid of PMI?
If your mortgage payments are current, PMI can automatically be cancelled when your loan principal reaches 78% of its original home value, in accordance with federal law. Your mortgage servicer will notify you about this change.
Alternately, you can ask your lender to release it earlier by submitting a written request and having an appraisal completed. Your lender will need proof that the value of your home has increased; this can be accomplished with either a simple letter confirming renovations to the property or through new appraisal that shows its increased worth since your original appraisal.
Refinancing is also an option to reduce PMI payments, though this comes with closing costs and could increase your mortgage rate. Before considering refinancing, be sure that any savings realized from not paying mortgage insurance outweigh these additional expenses, in order to determine whether refinancing is suitable.