4 Ways to Get Rid of PMI to Save Thousands
This blog was last updated January 18, 2023.
When you’re buying a house, there are a lot of things on your mind — and private mortgage insurance (PMI) may not be one of them. PMI is often required if you have a conventional loan and make a down payment of less than 20% since your lower down payment is seen as a riskier investment for the lender. As the Consumer Financial Protection Bureau reminds us, PMI isn’t designed to protect you. It’s designed to protect your lender in case you stop paying your loan. Below, we’ll cover how it works and how to get rid of PMI for good.
What is Private Mortgage Insurance?
Private mortgage insurance is a common requirement for mortgage borrowers who can’t afford the down payment (which is typically 20% of the home’s purchase price), as they’re seen as a bigger risk to the lender. PMI is quite common with government-backed loans, like FHA and USDA mortgages. PMI has become more common in the past several years — in 2020, more than two million homebuyers obtained PMI, a 53% increase from 2019.
The amount of time it takes to pay off PMI varies greatly depending on your particular situation, but a buyer who puts 10% down on a $450,000 home and pays $169 per month in PMI can expect to reach 20% equity in approximately six years.
What Does PMI Cost?
PMI is often rolled into your mortgage payment so you may not realize how much it’s costing you. With PMI costing 0.5% to 1% of an entire loan amount annually and the median listing price of a home at $388,310 as of 2022, you may be spending $323 a month on PMI.
Other PMI may require a one-time, upfront payment, and still others may require a mix of both upfront and monthly premiums. Check your loan terms if you’re unsure.
When Does PMI Go Away?
If you had to get PMI when you purchased your house, then, by law, your lender had to tell you how long it would take until you no longer had to pay PMI. That’s usually when you have 20% or more equity in your home with good payment history. However, some lenders require you to have a PMI contract for a certain length of time and lenders don’t automatically cancel PMI for you until you have 22% equity.
When you hit the 20% mark, you’ll want to cancel. Your annual statement should have information on who to call to cancel, according to Bankrate. However, this may take months as many lenders need you to put the request in writing and require a formal appraisal of the house before you can cancel. In the meantime, you still have to pay for PMI.
That’s the bad news. If you’re wondering how to get rid of PMI, the good news is that it’s not impossible.
Frequently Asked Questions About PMI
Can I remove PMI without refinancing?
Yes, you can — there are more than a few different ways to reach the 20% equity threshold without having to refinance. These include double checking your home value through an appraisal, boosting its value with renovations, or a home equity investment.
Can I cancel PMI if my home value increases?
That depends on how much your home value increases. The closer to the 20% equity mark you are, the less value you’ll need to make up the difference through an updated appraisal or renovation.
Do you have to pay 20% to avoid PMI?
The percentage of a home’s purchase price required for a down payment varies by lender, but 20% is the typical amount necessary to bypass PMI.
How to Get Rid of PMI Faster
1. Get a Home Appraisal
Before you rush to get a new appraisal, you’ll first want to check your lender’s terms. Some may require a couple of years of payments before they’ll eliminate PMI. Next, you’ll want to check a source like Zillow to get a rough idea of whether property values have increased. If your lender has no extenuating requirements and your property value has increased, then it may be worth getting a new appraisal.
As MortgageLoan.com explains, your original home appraisal may not reflect your current standing. For example, if your home was originally appraised at $200,000 and you still owe $180,000, then you’ve paid your balance down to 90%. However, if your home has increased in value and is worth $250,000, then the outstanding balance on your mortgage is under 80% of the value of your home (you’d be at 72%, in this case). At this point, you could request cancellation.
2. Increase Your Home’s Value
Home renovations, even smaller projects, can increase your home’s value. While refinishing your basement or adding a pool could certainly increase value, think updates like new kitchen cabinets and hardware, energy-efficient windows, a bathroom vanity, or even a fresh coat of paint. Remember: everyone’s personal style is different, so opt for more neutral tones and styles.
When you boost your home’s value, have your home appraised again to see if you’re closer to the 20% equity mark.
3. Request Early Cancellation
If your loan-to-value ratio has hit 80% or it will soon, start making your case for early cancellation. Using a mortgage amortization calculator, keep close track of where your equity stands so you can write to your lender in advance. The process can take months, so you’ll want to get it started sooner rather than later.
According to NerdWallet, you’ll need three things to improve your chances for cancellation: a good payment history (no payments 30 days late in the past year or 60-day late payments in the past two years), no other liens (home equity loans or HELOCs, for example), and an appraisal, proving the home’s value.
4. Tap into Your Home Equity to Eliminate PMI
Depending on when you purchased your home and how much it’s increased in value over the years, you may be sitting on a sizable chunk of equity. Instead of accessing those funds via a traditional loan (which may prevent you from cancelling PMI), you can access a portion of your equity via a home equity investment.
Unlike a loan, a home equity investment gives you access to cash that you can use to pay down your mortgage in exchange for a share of the future value of your home. And, because it’s not a loan, you won’t be taking on more debt, interest, or monthly payments.
No matter which method (or methods) you use to pay down your mortgage, you must request cancellation in writing. You’ll also want to familiarize yourself with any exceptions to PMI rules to see if any apply to your situation. For example, The Balance Everyday notes that some states have laws for PMI on second homes while other rules may apply for Federal Housing Administration or Department of Veterans Affairs loans. Gather all the facts as they relate to your specific home loan and financial situation to determine which method makes the most sense to eliminate your PMI.
You should know
We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.