Private mortgage insurance (PMI) is no stranger to many homebuyers. If you put less than 20% down on your conventional mortgage, there’s a good chance that you’ve been paying for PMI every month. Well, the good news is that PMI does not have to follow you around forever. Options are out there to remove PMI from your monthly mortgage payments.
In this article, we will explain what PMI is, how you might be able to avoid it if you haven’t bought a home yet, and how you can get rid of it if you have.
What is PMI?
PMI is there to protect your lender in the event that you are unable to pay your mortgage. It is not the same thing as homeowners’ insurance. Generally, it’s required for borrowers who take out a conventional loan and put down less than 20% for their down payment.
Borrowers can’t just opt out of PMI; certain requirements must be met to avoid it or cancel it. While this additional cost may be frustrating for some borrowers, PMI can be beneficial for borrowers in that it creates opportunities to buy a home with a smaller down payment.
How to Avoid PMI
Pay 20% Down Payment
If it is important to you not to have to pay PMI with your mortgage, the most straightforward way to avoid it is typically putting down at least 20% for a down payment. However, before going this route, it would be wise to think very carefully about your financial situation.
Even if you technically have enough to put 20% down, that doesn’t necessarily mean you should. Try to get a clear picture of your potential mortgage costs from your lender, and if you have a financial adviser, ask them for input.
Get a Veterans Affairs Loan, If Eligible
Another option that is only available to eligible veterans, active-duty servicemembers, and certain surviving spouses is the Veterans Affairs (VA) loan. This is a type of mortgage that is insured by the VA, so it does not require PMI. If you are eligible for a VA loan, it can potentially be a good way to buy a home with a lower down payment while still avoiding PMI.
How to Get Rid of PMI
Borrowers can eventually cancel their PMI if they meet certain benchmarks or take specific actions. Below are some of the ways you might be able to get rid of PMI.
Automatic Cancellation
Loan servicers must automatically cancel a borrower’s private mortgage insurance on the scheduled date when the borrower’s principal would hit 78% of the original value of the home. However, for this to happen, the borrower must be current on their payments. If you are behind on payments, your PMI would stay active until sometime after you catch up.
Similarly, PMI must be automatically canceled at the halfway point of your mortgage term, even if your loan principal is not yet at 78%. As with the other automatic cancellation option, you must be current on your payments for this to take effect.
Ask to Cancel
On the date that your principal balance is scheduled to hit 80% of the original home value, you can request that your loan servicer cancel your PMI. If you’ve made additional payments that reduced that balance to 80% before the scheduled date, you can still ask to remove PMI. For these purposes, “original home value” is the lower of either the original appraised value of the home or the contract sales price.
Your loan servicer must honor your request if you meet the following criteria:
- You made the request in writing.
- You are current on all payments and have a strong payment history.
- You can prove there are no junior liens (like a second mortgage) on your home.
- You can prove that your home has not decreased in value from the original value. This may likely require an appraisal.
Get a New Appraisal
If you have reason to believe that your home has increased in value, it may be worth getting a new appraisal to confirm that! Note that appraisals generally are not free. However, this could be worth doing if you’ve done the kinds of repairs or renovations that could increase your home’s value. Similarly, if you’ve noticed home prices going up in your neighborhood, you may want to consider an appraisal for that reason, too.
Sometimes, a borrower’s home value can increase enough to get them over that 20% equity threshold, which, depending on your circumstances, might help you get rid of your PMI a little faster.
Refinance
Now, refinancing your mortgage is a very big decision. It may not be wise to do so just to get rid of your PMI. Instead, carefully consider how refinancing could potentially impact your interest rate and monthly payments. If it makes sense for you to refinance your mortgage, and doing so removes your PMI, that’s great!
Final Thoughts
Private mortgage insurance can allow some borrowers to get a conventional mortgage with a lower down payment. However, it can also be a frustrating monthly cost while you have it. Luckily, there are ways to remove PMI over time. If getting rid of PMI is your goal, the best place to start is ensuring you are current on all payments and that you’re building a strong payment history. Then, you may want to consider some of the options we’ve laid out in this article.
This information is intended for educational purposes only. Products and interest rates subject to change without notice. Loan products are subject to credit approval and include terms and conditions, fees and other costs. Terms and conditions may apply. Property insurance is required on all loans secured by property. VA loan products are subject to VA eligibility requirements. Adjustable Rate Mortgage (ARM) interest rates and monthly payment are subject to adjustment. Upon submission of a full application, a mortgage banker will review and provide you with the terms, conditions, disclosures, and additional details on the interest rates that apply to your individual situation.
