Are you looking to remove PMI from your mortgage?
According to the National Association of Realtors, the median list price for homes is $232,000. If you are paying 1% in private mortgage insurance (PMI), that translates to an annual cost of $2,320 — or about $193 per month.
That’s a significant expense.
Many homeowners would benefit from removing PMI so they can redirect that money toward retirement savings, an emergency fund, debt repayment, or other priorities.
Like many people, I wish I had prioritized this sooner. In 2009 my husband and I bought a house while taking advantage of low prices and a first-time homebuyer credit, but we didn’t put 20% down.
We didn’t fully consider how mortgage insurance would affect our finances. We later sold that home and became full-time RVers, but we still wish we had found a way to avoid paying PMI.
A lot of buyers make the same mistake when taking out a mortgage. PMI can be costly and frustrating for several reasons:
- It’s expensive. PMI typically costs between 0.5% and 1.0% of the loan amount each year. For a $150,000 mortgage, that could mean about $1,500 annually, or $125 per month.
- It doesn’t protect you. Despite the word “insurance,” PMI protects the lender, not the borrower, in case the borrower defaults on the loan.
- It’s not always easy to remove. Removing PMI often requires meeting specific conditions and following procedures set by your lender. It’s not always something you can cancel immediately after getting the loan.
What you need to know to remove PMI
What is PMI?
Private mortgage insurance (PMI) is insurance on a conventional home loan that protects the lender if the borrower stops making payments. PMI is typically required when a buyer puts down less than 20% of the home’s purchase price. For example, if a home costs $200,000 and you put down less than $40,000, your lender will likely require PMI.
The same principle can apply when refinancing. If you refinance without achieving more than 20% equity, the lender may require PMI on the new loan.
You may be able to remove PMI from your mortgage
Generally, you need at least 20% equity in your home to remove PMI. Under the Homeowners Protection Act, your lender must automatically terminate PMI on a conventional loan when the loan balance reaches 78% of the original value of the home, provided you are current on your payments and have reached the lender’s specified date.
You can also request cancellation earlier once your principal balance reaches 80% of the original value of the home. If your home has appreciated in value, you may be able to obtain a new appraisal to demonstrate that you already have at least 20% equity and request PMI removal sooner.
The Homeowners Protection Act gives you the right to request that your lender cancel PMI when you have reached the date when the principal balance of your mortgage is scheduled to fall to 80% of the original value of your home. This date should have been given to you in writing on a PMI disclosure form when you received your mortgage. If you can’t find the disclosure form, contact your lender. You can also make this request earlier if you have made additional payments to reduce the principal balance of your mortgage to 80% of the original value of your home.
Expect some requirements and paperwork
Removing PMI isn’t always as simple as notifying your lender that you’ve reached the necessary equity level. Many lenders require a written request to cancel PMI and documentation showing your ability to continue making payments. You may also need a current appraisal to verify that the home’s value hasn’t declined below the threshold used when your mortgage began.
Each lender has its own procedures, so contact your lender early to learn the specific steps and documentation required. Acting promptly helps you plan how to reach the equity threshold and prepare any necessary paperwork.
Special rules for FHA loans
If you have an FHA loan and put down less than 20%, you pay a mortgage insurance premium (MIP) rather than PMI. MIP functions similarly but follows different rules.
For FHA loans closed after June 2, 2013, with a down payment of less than 10%, MIP generally cannot be removed for the life of the loan. Loans closed before that date or loans with different terms may have other rules, such as removal after the balance reaches a certain percentage on shorter-term loans.
One option for FHA borrowers who want to eliminate mortgage insurance is to refinance into a conventional loan once they have built more than 20% equity.
Ultimately, the best approach is to research your loan’s specific terms, contact your lender, and learn the exact steps required to remove mortgage insurance. Eliminating PMI or MIP can free up monthly cash flow for more important financial goals.
Do you currently have PMI on your mortgage? Are you trying to remove it?