How to Get Rid of PMI Early
PMI protects mortgage lenders against the risk of default when you make a down payment of less than 20%. Here are three ways to get rid of PMI early.
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Private mortgage insurance (PMI) can cost homeowners hundreds or thousands of dollars per year. Thankfully, it doesn't last forever. At the latest, PMI must be removed from your mortgage once you've completed half of your amortization schedule.
However, many homeowners may be able to get rid of PMI much sooner. For example, my wife and I were able to remove PMI (which in our case added about $50 per month to our mortgage) after just two years of homeownership. Over five years later, we still live in the same home. So eliminating PMI when we did has already saved us more than $3,000.
In this article, we'll start by explaining what PMI is and how much it typically costs. Then we'll break down the three main ways to get rid of it ahead of schedule (without making extra mortgage payments).
What Is PMI?
Private mortgage insurance (PMI) is a type of insurance that protects your lender (not you) if you were to default on your loan. Typically, PMI is required when a homebuyer puts less than a 20% down payment on a conventional mortgage.
Even if you aren't able to put 20% down on your home loan, you may still be able to avoid PMI by taking out a non-conforming mortgage. For example, jumbo loans and profession-specific mortgages often don't require PMI despite having low down payment requirements.
PMI is often confused with MIP (mortgage insurance premium) which is required on FHA home loans. Both types of insurance protect the lender if you stop making payments. But while PMI can be removed, you'll have to pay MIP for the duration of your loan term if your mortgage closed after June 2, 2013 and you made less than a 10% down payment.
How Much Does PMI Cost?
The exact price you pay for PMI will depend on a variety of factors such as your FICO® Score, down payment amount, and loan type. But according to Rocket Mortgage, it will typically cost you 0.50% to 1% of your loan amount each year. So for a $250,000 mortgage, that translates to an annual cost of $1,250 to $2,500.
PMI premiums are usually paid monthly by being added to your mortgage payment along with other costs such as your property taxes and homeowner's insurance premiums. In this way, a $1,500 annual premium would add $125 to your monthly mortgage amount.
Related: How to Reduce Your Mortgage Insurance Costs
When Does PMI Go Away?
Your mortgage broker is required to eliminate PMI from your home loan once you've paid down your mortgage balance to 78% of your original purchase price or you reach the halfway point of your amortization schedule.
For either type of PMI termination to occur, you must be current on your mortgage payments. If you are current, your lender must stop your PMI at your mortgage schedule's halfway point even if your loan-to-value ratio (LTV) at that time is still above 78%.
How to Get Rid of PMI Early
If you make just a 3% down payment on a 30-year mortgage, it could take nearly 10 years for you to pay down your loan to 78% of your home's original appraised value. And if you had to wait till the halfway point for PMI to fall off, you'd be paying it for 15 years.
That's a lot of extra money that you'd pay over time for an insurance policy that can only benefit your lender. Thankfully, there are multiple ways to get rid of PMI in a much shorter time period. Below, we break down three of your best options for early PMI removal.
It's worth mentioning that there is a fourth option which would be to pay extra towards your mortgage each year or make one lump sum payment to get your LTV down to 78% faster. But since that might not be feasible for everyone's budget, the three strategies explained below don't require extra principal payments.
1. Request Early PMI Cancellation Once You Reach 80% LTV of Your Original Appraised Value
This first option requires the least amount of effort but it also takes the longest to qualify for. All homeowners have the right to request that their servicers remove PMI once they've paid their mortgages down to a loan-to-value ratio (LTV) of 80% (i.e. if your home appraised for $100k when you got your mortgage and your outstanding loan balance is $80k, then your LTV is 80%).
Remember, your mortgage lender is required to remove PMI once your LTV reaches 78% anyway. So requesting early termination of PMI once your loan balance is 80% of your original appraised value will typically only reduce your PMI payoff date by a year or two.
Still, depending on the size of your mortgage, that could mean several hundred dollars of savings. To maximize your benefit, you'll want to request the cancellation on the exact date that you've paid down your balance to 80% of your home's purchase price. You should be able to find this date on your original PMI disclosure form. Alternatively, you can call your mortgage servicing company to get the date.
Note that you must make your early PMI cancellation request in writing and approval isn't guaranteed. For example, your request might be denied if you've taken out a second mortgage on your home. And if a new home appraisal is required, your request could be denied if it shows that your home's value has declined below its original value.
2. Get a New Appraisal (If You Think Your Home Has Increased in Value)
There are two ways for your loan-to-value (LTV) ratio to go down. The first way is by paying down your mortgage balance. The second, and often faster way, is by your home increasing in value.
For example, let's say that you buy a $250,000 home and put down 5% ($12,500) for a total mortgage amount of $237,500. Three years later, your mortgage balance has been paid down to $224,000 and your home has appreciated in value to $300,000.
Dividing your loan balance ($224,000) by your home's current value ($300,000), you'd find your LTV to be just under 75% ($224,000 / $300,000 = 0.746). If you could confirm these LTV numbers through a professional home appraisal (paid for at your own expense), you could ask your lender to remove your PMI.
You can't typically use this reappraisal method to remove PMI until you've been paying on your loan for at least two years. Then, from years two through five, you'll need an LTV of 75% for it to work. But if you've had your loan for at least five years, you can request PMI removal with an after-appraisal LTV of 80% or below.
3. Refinance Your Mortgage With a New LTV of 80% or Less
This last option is my personal favorite and is the one that my wife and I used to get rid of PMI early on our own mortgage. By refinancing our mortgage after just two years, we were able to reduce our mortgage interest rate and remove PMI at the same time!
Since refinancing means taking out a brand new mortgage, you'll only need to demonstrate to your lender that your new loan's LTV would be 80% or less. Remember, with the reappraisal route, you'd need an LTV of 75% or lower to remove PMI within the first five years.
Returning to our previous loan example, let's say that after two years you've paid down your mortgage to $228,000. You apply for refinancing and the lender orders an appraisal of your home. Your home appraises at $285,000, giving you an LTV of exactly 80% ($228,000 / $285,000 = 0.80).
In this example, PMI would not be included on your new mortgage. That alone would reduce your mortgage payments by $1,250 to $2,500 per year. Plus, depending on how much lower your new interest rate would be compared to your original mortgage rate, you could also save thousands more in interest charges over the life of your loan.
It's important to point out that there will typically be fees and closing costs associated with refinancing your mortgage. If you plan to move soon, you might not have enough time to make up those costs in savings. Be sure to calculate your break-even point to help you decide if mortgage refinancing would be a good option.
The Bottom Line
No one likes having to pay for private mortgage insurance (PMI). However, it should be pointed out that the existence of PMI does indirectly benefit homebuyers. Without it, few mortgage lenders would be willing to offer mortgages with low down payment requirements.
Because they can lean on the protection of PMI, some lenders will accept down payments as low as 3% on conventional loans. That ultimately makes mortgages more accessible for everyone.
Even if you don't take any action whatsoever, PMI will eventually fall off of your mortgage once your loan balance reaches 78% of the original value of your home. But by taking advantage of one of the three strategies discussed above, you might be able to move up your PMI cancellation date by several years.
Clint Proctor is a freelance writer and founder of WalletWiseGuy.com, where he writes about how students and millennials can win with money. His work has been featured in several major publications including Business Insider, U.S News and World Report, Yahoo Finance, and Forbes.