How to Lower Your PMI
Unless you’re making a 20% down payment to purchase your home, you’ve probably discussed private mortgage insurance with your lender and what it means for your monthly mortgage payment.
It’s an added cost that could stick around for a good portion of your loan term. But it is possible to reduce PMI and even drop it more quickly than realize. Below, we explore how you can do both.
A crash course on private mortgage insurance
Private mortgage insurance, or PMI for short, is typically necessary for conventional mortgages that start out with a loan-to-value (LTV) ratio higher than 80% — meaning the borrower contributed less than a 20% down payment at the closing table.
PMI doesn’t protect the borrower; it protects the lender in the event the borrower stops making their monthly mortgage payments. If you’re making a small down payment, you’re considered more of a risk than a borrower who makes a larger down payment. Your mandatory PMI payments are the extra cost you assume to account for the extra risk of mortgage default you potentially pose to your lender.
There are three different payment options for private mortgage insurance:
- The monthly premium, which is added to your mortgage payment and charged monthly.
- The single, upfront premium, which is paid in one lump sum as part of your closing costs.
- The split premium, which is a combination of an upfront premium and a monthly premium.
The amount you pay for PMI depends on your credit score and LTV ratio, but could range from $30 to $70 each month for every $100,000 borrowed.
PMI vs. MIP
Private mortgage insurance isn’t the same as a mortgage insurance premium (MIP), which is required of borrowers who take out an FHA loan backed by the U.S. Department of Housing and Urban Development.
There are two types of MIP: upfront and annual. You pay the upfront premium at closing when you first get your mortgage, and you’re responsible for the annual premium each year. It’s divided into 12 installments and added to your monthly mortgage payment.
If you put down less than 10%, you’ll be responsible for paying MIP for the life of your loan; otherwise, you can drop it after 11 years.
3 ways to reduce your PMI payments
Your PMI isn’t permanent. It’s an insurance product, and you can often find ways to negotiate a better rate. If you’re anxious to lower your private mortgage insurance payments, consider the following options.
Get a new appraisal
Home price growth may have slowed a bit, but values are still trending upward. In fact, prices are up 4.4% year over last year’s (between January 2018 and 2019), according to the latest data from CoreLogic’s home price index.
Remember: The more your home is worth, the lower your outstanding mortgage balance is as a percentage of the value. One way to reduce your PMI payments is to request that your lender order a new home appraisal on your behalf to determine if your LTV ratio has dropped significantly due to home price appreciation.
Keep in mind, however, that you’d be responsible for covering the appraisal fee, which could cost anywhere from $300 to $400, or even higher.
Refinance your mortgage
If you’re in a better position than when you first borrowed your mortgage, it might make sense to refinance your mortgage and try to reduce your PMI payments in the process.
Pava Leyrer, chief operating officer at Northern Mortgage Services in Grandville, Mich., recently had a borrower reach out about 10 months after closing his loan to determine his options for lowering PMI. He had started with a large loan amount and less-than-stellar credit, meaning he was paying a relatively large amount for PMI. But he had been able to make some dramatic improvements in a relatively short time period — increasing his credit score.
“Between their credit score and the fact that houses are appreciating right now, even in a short time frame, they were able to go to a position of 10% equity,” Leyrer said.
By refinancing, the borrower was able to save more than $180 on their total monthly mortgage payment, which included a PMI reduction. Leyrer pointed out that this was a unique situation and many borrowers may not save quite as much on their mortgage payments. Still, it might be worth talking to your lender to see if a refinance works for you.
Target your principal balance
Dedicate any extra room in your budget to paying down your mortgage principal and increasing your equity at a faster pace than what your amortization schedule calls for. One of the easiest ways to accomplish this is by switching to biweekly mortgage payments, which works out to one extra payment each year. You could also tack on an additional amount to each monthly payment to further reduce your principal.
Be sure to tell your lender specifically that you want to dedicate the extra money to your principal. Otherwise, you might not get the credit you’re hoping for.
How to get rid of PMI
Fortunately, conventional mortgage borrowers have the ability to do away with private mortgage insurance under certain conditions. If you’re really itching to cancel PMI, you can do your due diligence and track whether you’re getting close to the 20% equity you need. Otherwise, you can let your payments take their course.
If you’ve done the math and believe you’ve reached an 80% loan-to-value ratio, you can request that your lender cancel your private mortgage insurance payments. The request to your lender must be made in writing; you’ll need to have a good payment history and be current on your mortgage payments, and more than likely you’ll also have to pay for an appraisal to prove your home’s current value supports that you have an 80% LTV.
Wait it out
It may work better for you to stay the course, continue making your agreed-upon mortgage payments and wait for your amortization schedule to play out as normal. The good news is, if you forget to request a PMI cancellation at the point you reach 20% equity in your home, your mortgage lender is required to automatically cancel your mortgage insurance when you hit 22% equity.
Pay a single premium
Remember: Paying private mortgage insurance on a monthly basis isn’t your only option — you can pay your premium upfront instead. Going this route means you either pay the single premium as part of your closing costs or add it to your loan amount. However, there are risks. If you refinance or move at a later date, you likely won’t get the money that you paid up-front back.
Single-premium PMI isn’t available with every mortgage company — contact your lender before your mortgage closing to find out whether it’s offered as an option.
Make a larger down payment
The best way to avoid dealing with private mortgage insurance altogether is to save for a 20% down payment before you start the homebuying process. This will put you at the 80% loan-to-value ratio you’ll need to sidestep the PMI requirement and also save you money on your mortgage payments. A larger down payment could also mean a lower interest rate.
The bottom line
Private mortgage insurance is meant to protect mortgage lenders from the risk they take on by lending to borrowers with smaller down payments. But it also helps prospective homebuyers gain entry into the housing market much sooner than if they would’ve waited to save up a 20% down payment — something that can take more than six years to accomplish, depending on finances.
It’s possible to reduce or remove PMI sooner than expected, if you put in the extra work to make it happen.
Read LendingTree’s explainer on how to choose private mortgage insurance for more guidance on getting a good PMI deal.