For home buyers putting less than 20% down, Private Mortgage Insurance (PMI) is the cost of doing business. PMI protects lenders if you fail to make mortgage payments. And at the cost of approximately .5-1.5% of the loan value, PMI can run a new homeowner a few hundred dollars extra each month.
Here are the best ways to get rid of PMI and get to paying down the principal on your loan faster.
Why Borrowers Need to Pay PMI
If you’re thinking about ways to remove PMI, it’s critical to understand why a borrower is saddled with this unwanted mortgage addition in the first place. PMI is initiated when a loan-to-value (LTV) ratio is greater than 80%. You can calculate the LTV by taking your current loan balance and dividing it by the appraisal value.
If your purchase price was $200,000, and you put $20,000 down, the LTV would be $180,000/$200,000 = .9 = 90%. To reach an 80% LTV and avoid PMI, you would have needed to put at least $40,000 down.
The LTV is the primary driver when lenders look at the cancellation of PMI. Once you reach an LTV of less than 80%, the lender perceives that you’re no longer as risky of a borrower.
It’s worth noting that borrowers shouldn’t put themselves in a bad financial situation to avoid PMI. It’s a financial burden, certainly. But strapping yourself to put 20% down on the purchase in the first place isn’t always the most prudent move. Especially if that means you’re taking on debt to furnish or do home improvement projects following purchase.
How to Get Rid of Private Mortgage Insurance
There are four options for homeowners to remove the financial burden of PMI.
Wait For it to Happen on its Own
To be eligible to eliminate PMI automatically, you’ll need to be sure that you’ve:
- Made on-time payments. If you’ve missed a scheduled payment, the lender may disqualify you from PMI cancellation.
- Remained in good standing. The loan must be clean, meaning you have no liens.
Events that trigger the insurer to automatically cancel PMI are when:
- Your balance is 78% or less of the home’s appraisal value.
- The loan reaches the halfway point, meaning 15 years into a 30-year mortgage.
Request Early Cancellation
Any request for cancellation of PMI must be submitted to your mortgage lender in writing. And homeowners aren’t eligible to request cancellation until they reach at least 20% equity in their home. This means you can write to the lender to request removal when LTV hits 80%.
The lender doesn’t necessarily need to cancel PMI at that point but is more likely to do so if you’ve never missed a payment and the loan is in good standing. If the lender doesn’t cancel per written request, they will need to automatically cancel once LTV reaches 78%, which hopefully isn’t too far in the future.
Falling interest rates are a prime time to see if you can refinance into a new mortgage that would be eligible to cancel PMI. If your refinance’s loan balance will be less than 80% of the home’s value, you may not need PMI on the new loan.
The refinance tactic works well for owners in neighborhoods where prices are rising. But if your home is in an area experiencing a dip, a new refinance could put you in a position where you need to purchase PMI instead.
Be cautious when it comes to jumping into a refinance for the sole reason of ridding yourself of PMI. Sometimes the costs associated can be more than the cancellation of PMI is worth. Use a calculator to figure out how much you’ll spend on refinancing and compare that to the cost of keeping PMI until you reach 80% LTV.
Get a New Appraisal
PMI is tied directly to equity in the home as it compares to the appraisal price. That means if home values in your area are rising, suddenly your LTV may be less, and you may be eligible to cancel PMI sooner. A new appraisal may also be a good idea if you’ve completed significant home renovations that have drastically increased your home’s value.
If it’s been five years since the home purchase, PMI can be canceled when the loan balance is not greater than 80% of the newly appraised value. But if you’ve only been the owner for two years, it’ll take a balance of no more than 75% to pursue cancellation.
If you’re using a new appraisal to get rid of PMI, be sure to check the fine print with your lender first. You’ll want to be certain you’re using an approved appraisal company or broker price opinion before you shell out the cash for the appraisal, which can run several hundred dollars.
Know Your PMI Payoff
Lenders should provide information related to PMI payoff in your PMI disclosure form at closing. If you’re unsure when you’ll hit the amount to remove PMI, reach out to your lender or perform a simple calculation yourself.
To calculate the mortgage balance needed to remove PMI, multiply the home’s original purchase price by .8. That’s the amount remaining on the loan that will grant you the ability to write to the lender requesting PMI removal.
You can work to built equity and hit this number faster by:
- Scheduling an extra mortgage payment to go directly toward the principal balance. If you have the financial means to do so, budgeting to make a 13th mortgage payment each year is an effective way to quickly dig into the principal balance and quickly reduce the loan amount.
- Making a lump sum principal payment at the end of each year. You can put extra income from side hustles or second jobs throughout the year into a savings account. Then, apply a large lump sum payment to the loan at the end of the year. Taking several thousand dollars off your principal balance at once can move the needle on your balance significantly and potentially put you into PMI removal territory.
- Paying a little bit more than what’s due each month. By paying only $50 more towards your mortgage each month, you can decrease the overall balance much more quickly and get to PMI removal sooner.
Working to pay down the mortgage to remove PMI also means you may be paying off the larger loan sooner. That means savings on interest over time and ultimately fewer payments.
The Bottom Line
PMI is a costly necessity, but luckily it’s temporary. There are many ways for homeowners to alleviate PMI, including establishing 20% equity in the home, reaching the halfway point of a mortgage, or refinancing. But each of these options should be weighed against the broader financial implications to make sure it’s the right move financially both now and over the long-term.