How to Get Rid of Private Mortgage Insurance (PMI)
Private mortgage insurance (PMI) allows you to put down less than 20% on a conventional loan, but it also adds another expensive line item to your monthly payments. If you’re wondering how to get rid of PMI payments, read on for help with leveraging your equity or refinancing your loan to remove PMI from your mortgage.
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4 options to get rid of PMI
For homeowners with a conventional loan, the rules about who must have private mortgage insurance and for how long come from the Homeowners Protection Act, also known as the PMI Cancellation Act. There are four methods you can use to terminate your PMI, according to these guidelines:
- Wait for PMI to terminate automatically. When your principal loan balance reaches 78% of the home’s original value, your PMI will automatically terminate. Additionally, if you reach the halfway point of your repayment term — 15 years on a 30-year loan, for example — the PMI will drop off regardless of the principal balance.
- Request PMI cancellation. You can request PMI cancellation before it automatically terminates — when the principal loan balance reaches 80% of the home’s original value (the date you’re expected to reach 80% should be listed on your PMI disclosure form or provided by your lender). The timeline is really in your hands, though, because you’re allowed to pay more than your scheduled payments require. If you can manage to pay down the balance to 80% ahead of the scheduled payments, you’ll significantly speed up how quickly you drop PMI. For the highly motivated borrowers who meet the other criteria — e.g., have been making regular payments and are willing to pay for an appraisal — this can be a great option.
- Refinance to get rid of PMI. Another option is to refinance into a new conventional loan. If you have at least 20% in home equity, you can avoid PMI payments on the new loan; just be sure you weigh the benefits against the costs of a refinance. Unlike requesting a cancellation, which is free, refinancing requires you to pay closing costs and provide documentation of your home’s value and your income, assets and credit. You should also be aware of mandatory waiting periods, also known as “seasoning requirements,” that can make it difficult to refinance within one year of buying the home.
- Refinance into a piggyback loan to get rid of PMI. If you don’t yet have at least 20% in home equity, you can split your refinance into a first and second mortgage to get rid of PMI. Lenders call this a “piggyback refinance loan,” and it works like this: 1. You take out a first mortgage to 80% of your home’s value 2. Finance the balance of your equity above 80% with a smaller second mortgage like a home equity loan or home equity line of credit (HELOC). The result — You get rid of your old PMI and avoid paying any new PMI premium.
- Get a new appraisal if your home value increases. If your home’s value increases enough that you reach the 20% equity threshold, you can request cancellation just as you would have if you’d paid the principal balance down to 80%. You’ll be required to prove that your home has gained value, so be prepared to order a home appraisal or, if you’re looking for a cheaper option, a broker price opinion (BPO).
How does PMI work?
PMI exists to protect your lender in case you default on the loan. Because lenders have to make an educated guess about whether you’ll be able to repay a loan, they aren’t willing to take a risk on a borrower who can’t put down at least 20% — at least not without the safety net of PMI. If you’re unable to make payments and the loan goes into default, PMI will cover what you aren’t able to pay.
You’re required to get PMI on a conventional loan when you’re buying a house with less than a 20% down payment, or you’re refinancing and you have less than 20% equity in the home. Homebuyers with a traditional 80/20 mortgage, which is a loan for 80% of the purchase price and a 20% down payment, can avoid PMI.
There are slightly different rules for government-backed loan programs.
FHA loans: If you’re buying or refinancing with a loan backed by the Federal Housing Administration (FHA), you’ll likely pay an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP) that typically can’t be canceled unless you put down at least 10% at closing. Luckily, FHA mortgage insurance is getting more affordable because, beginning March 20, 2023, MIP will drop by 0.30 percentage points.
VA loans: Loans guaranteed by the U.S. Department of Veterans Affairs (VA) require an upfront funding fee instead of ongoing mortgage insurance. The cost is based on your loan amount, down payment and whether it’s your first time using VA benefits.
USDA loans: The U.S. Department of Agriculture (USDA) requires an upfront loan guarantee fee (that may not exceed 1% of the principal loan balance), and an annual guarantee fee (that may not exceed 0.35% of the average annual scheduled unpaid principal balance).
The cost of PMI
Annual PMI rates for a conventional loan range from 0.15% to 1.95% of the loan amount. PMI payments average $30 to $70 per month for each $100,000 you borrow, according to Freddie Mac.
The mortgage insurance company calculates PMI based on several factors, including your credit score and the size of your down payment (or your home equity amount if you’re refinancing). However, other factors can raise or lower your PMI cost, which makes it complicated to calculate an exact payment.
For example, your PMI payment may be higher if you borrow above the conforming loan limit — which is $726,200 for 2023 in most markets — or if you’re taking out a loan on a second home. A good option is to use a mortgage calculator to wrangle all of this information into an estimated PMI payment amount.
Thankfully, if you want to know what your loan balance will need to be to cancel your PMI, you have a much simpler task. Just multiply your original home purchase price by 0.80 for an estimate of when you’ll be rid of PMI payments. If you purchased a $300,000 home, for example, you can cancel your PMI when the principal balance reaches $240,000.
How to avoid PMI with a no-PMI mortgage
If you don’t want to pay PMI or worry about how to cancel it, you can avoid the entire cost by getting a mortgage that doesn’t require PMI. Here are some ways to get into a no-PMI loan:
A bigger down payment.If you want a mortgage without PMI, you’ll need to make a down payment of at least 20%. Remember to keep some cash on hand for home repairs and emergencies.
Piggyback loans.No-PMI loans include “piggyback” loans, also known as “80-10-10” loans or combination loans. Borrowers take out a first mortgage for 80% of the home value, a second loan for 10% and make a 10% down payment. Typically, you’ll need good credit and enough income to cover the payments. The interest rate on a second mortgage will be higher than the rate on the first loan, but that may not outweigh the benefit of avoiding PMI.
Lender-paid PMI loan. The lender covers your PMI and, in return, you agree to pay a higher interest rate for the life of the loan. You and your lender should compare these options to see if the higher rate is worth what you would save by avoiding PMI payments.
VA or USDA loan.If you’re a military borrower or you’re purchasing in a rural area, you may qualify for a VA loan backed by the U.S. Department of Veterans Affairs, or a USDA loan guaranteed by the U.S. Department of Agriculture. As mentioned above, neither loan requires PMI, but they do come with other fees to consider.