How to get rid of private mortgage insurance

Private Mortgage Insurance (PMI) is a type of insurance that protects lenders if a borrower defaults on their loan. Unfortunately, PMI is required on conventional loans if your down payment is less than 20% — but that doesn’t mean you have to pay it for your entire loan term. There are ways to get rid of PMI, even if you’re still paying off your mortgage.

How to get rid of PMI

Option 1: Wait for your PMI to automatically expire

The first option for retiring your PMI is to let it run out. As a homeowner, you’re required to pay PMI while your loan’s principal balance is greater than 78% of your home’s purchase price. However, your lender is legally required to terminate PMI when the balance of your loan reaches 78% of the purchase price of your home and you have no missed payments.
While lenders are required to drop your PMI once you reach the 78% milestone, it can sometimes get overlooked. As such, we suggest a follow-up with your lender to make sure they remove your PMI on time. Set up a calendar reminder so you don’t forget.

Wondering where to find your PMI expiration date?

To find your PMI expiration date, refer to your Loan Estimate and Closing Disclosure paperwork. If you can’t find it, contact your lender.

Option 2: Request cancellation of your PMI

Instead of waiting for your PMI to retire automatically, you can contact your lender and ask them to cancel your PMI. You can do this once you pay down your loan’s principal to below 78%of your home’s value. To request cancellation with your lender, you must:

• Put the request for cancellation in writing.
• Double-check that you’re current on your payments and in good standing on your loan.
• Verify that there are no liens on your home, such as a second mortgage.

Additionally, you may need to get a new appraisal to prove that the home’s value hasn’t dipped below its original value. If it has, your lender may deny cancellation.

Option 3: Refinance your mortgage

Refinancing can be a good strategy to eliminate your PMI, especially when interest rates are low and your home has increased in value. As long as you’ll owe less than 78% on the home’s purchase price with a new refinance loan, you can get rid of PMI. Along with making it possible to ditch PMI, other benefits of refinancing include:

• The ability to lower your monthly payment.
• The option to change the terms of your loan, e.g., going from a 30-year to a 15-year loan or from an adjustable-rate from a fixed-rate loan.
• Allowing you to switch to a more desirable lender.

Keep in mind that refinancing can run into the thousands of dollars, so you want to make sure the savings outweigh the costs. You can do this by calculating your refinance break-even point.

How to calculate a refinance break-even point

To get your refinance break-even point, divide the cost of the refinance by the monthly savings. For example, if the refinance costs $4000 and the monthly savings from the refinance is $250, the break-even point on the refinance is 16 months ($4000/$250=16). After the 16-month mark, you can start putting the monthly savings in your pocket.

Option 4: Get a new appraisal

If your home significantly increased in value since you bought it, the increased equity could help you get rid of PMI. Since PMI is based on the home’s original purchase price, you’ll pay PMI until the home’s equity falls below 20%. If you can show your lender a reappraisal that shows the equity increase to 20% or more, you could be on the way to eliminating your PMI.

How PMI works

The amount of PMI you need to pay is calculated as a percentage of the outstanding principal of your loan amount — anywhere from .25 to 2% of your loan’s balance annually, which can run into the thousands. The PMI premium can be paid several ways:

• As a monthly premium added into your monthly mortgage payment.
• As an upfront premium, which may not be refundable if you refinance or move out of the property. Sometimes you can negotiate with the seller to pay this for you.
• As both a monthly premium and upfront payment.

There are five types of PMI:

• Borrower-paid mortgage insurance (BPMI). As the most common type of private mortgage insurance (PMI), it’s paid as a monthly fee as part of your mortgage payment until you reach 22% equity.
• Lender-paid mortgage insurance (LPMI). With LPMI, your mortgage insurance is paid by the lender, but the downside is that you may have to pay a higher interest rate.
• Single-premium mortgage insurance (SPMI). SPMI is paid as a single lump sum at the time of closing or can be rolled into your mortgage. It often costs less than PMI but is nonrefundable if you refinance or sell the home.
• Split-premium mortgage insurance. This is a combination of BPMI and SPMI, where you pay part of the premium as a lump sum and part as a monthly payment. It can be a good option if you have a high debt-to-income ratio, and BPMI would increase your monthly payment beyond reach.
• Federal home loan mortgage protection (MIP). This insurance is used for FHA loans and requires both an upfront and monthly premium. MIP premiums are often higher than for a conventional loan, and you usually can’t remove it from an FHA loan unless you refinance to a conventional loan.

Why do lenders require private mortgage insurance?

Private mortgage insurance is insurance that protects lenders from higher risk conventional loans. If you default on your loan, PMI ensures the lender is paid back. If you’re a home buyer with a down payment of less than 20%, unfortunately, you can expect to pay PMI.

Mortgages that do not require PMI

Some lenders offer mortgage products that don’t require PMI, for example:

• VA loans. Besides not requiring any money down, VA loans don’t require PMI either. To qualify, you need to meet the VA’s service history requirements and credit and income requirements.
• Neighborhood Assistance Corporation of America (NACA). If you become a member of NACA, you don’t need to pay for PMI with their loan program. Note that NACA’s Best in America Mortgage is limited to low-to-moderate income borrowers.
• Specialized loans. Some lenders offer their customers specialized loans that waive the PMI requirement. However, the lender will usually compensate by requiring a higher interest rate or sometimes by allowing the seller to help pay for your PMI at closing time.

To find lenders that will waive PMI when your down payment is under 20%, you can compare lenders or contact the mortgage company directly and ask.

What are my rights as a borrower?

As a borrower, you have rights under the Homeowners Protection Act and the PMI Cancellation Act. Under the federal Homeowners Protection Act (HPA), you have the right to remove PMI from your home loan in two ways:

• Automatic termination on the date when the balance of your loan reaches 78% of the property’s purchase price. The PMI disclosure that accompanies your mortgage paperwork will reflect the PMI termination date.
• Request the manual removal of PMI when you’ve hit 78% of your home’s principal balance of the property’s original value. Manual PMI cancellation applies particularly if you’ve made extra payments on your loan ahead of your termination date.

If for any reason you end up hitting a wall with your lender when trying to cancel PMI, call the Consumer Financial Protection Bureau at 855-411-2372 to better understand your rights or to file a complaint.

Bottom line

PMI insurance can add thousands of dollars to the cost of owning your home. But the good news is you don’t need to pay it forever. Get rid of PMI through automatic termination, refinancing, requesting its removal if you already have it or choosing a loan that doesn’t require it. To find a lender that can help you out, visit our mortgage finder.

Frequently asked questions

• How do I get rid of PMI without waiting five years?

  Most loans have a seasoning requirement, which means you must wait a specific amount of time before you can get rid of PMI with a refinance — usually at least two years. Check with your lender for details.

• Is it worth refinancing to get rid of PMI?

  If you plan on staying in the house longer than your break-even point — the point at which the monthly savings from the refinance outweighs the cost of the refinance — it can be worth it. It can also be worthwhile if you get a refinance with no closing costs.

• What is the fastest way to get rid of PMI?

  The fastest way to get rid of PMI is to reach 20% equity by paying down your home loan faster with extra payments, bimonthly payments or a lump sum payment. Even making an extra $50 to $100 payment every month can drastically reduce your outstanding balance, helping you save thousands in interest too.