Did you buy a house with a down payment of less than 20%? If so, the home loan lender or bank required you to buy mortgage insurance, also known as PMI. The same is true if you refinanced with equity under 20%. Private mortgage insurance is a significant extra expense each month on top of your mortgage payment. You can get rid of PMI if you meet certain conditions. Let’s examine the process so you know exactly how to get rid of mortgage insurance on private, conventional and government home loans.
Overview of Mortgage Insurance (PMI or MI)
When a lender issues a loan that is 80% LTV or higher, it will require mortgage insurance to ensure that they get paid back if you default on the loan. It has been shown that borrowers who put down less than 20% are more likely to default on the mortgage. PMI covers a large part of the balance of the loan if you default. PMI is used because it allows lenders to make more higher risk loans than it otherwise would. In a sense, PMI is a good thing for the mortgage industry as it allows more people with less money available to buy a home.
Talk to proven and experienced lending professionals because there is an art to getting rid of mortgage insurance and PMI.
That said, there is no question that paying PMI each month is expensive. So, it is smart to want to get rid of it as soon as possible. First, to get rid of PMI, you have to have at least 20% equity in the property. You have to ask the lender to drop PMI once you paid down your mortgage balance to 80% of the value of the home, according to the most recent appraised value. When the balance decreases to 78%, the bank or lender is required to drop the private mortgage insurance.
New home buyers continue to ask me, “Do you have to have mortgage insurance?”, as they consider obtaining a pre-approval on a home loan.
An exception to this is if you have a FHA-home loan that has been issued in the last few years. For most of those loans, you cannot eliminate PMI. The exception is if you put down more than 10%; in that case, PMI can be cancelled after 11 years. We get a lot of inquiries about cancelling FHA mortgage insurance. There are a lot of frustrated homeowners that want to know how to remove PMI from fha loans.
How to Cancel PMI
Once you have reached 80% equity in your loan, here is what you need to do to cancel PMI:
- Get a new home appraisal. Some lenders will look at a new appraisal rather than the original price at sale when determining if you have 20% equity. An appraisal can cost up to $500, but it is worth paying it to get rid of PMI payments. If you have reached 20% equity, you can request that the lender cancel your PMI payments.
- Prepay on the loan: A good way to get rid of mortgage insurance faster is to prepay on the loan. Even if you pay only $50 more per month, this can mean a serious reduction in your mortgage balance as months go by.
- Live in a high appreciation area: Many people in strong housing markets find that they can get rid of PMI much faster just because the value of the home is rising so quickly.
- Do remodeling: If you do smart renovations on your property, this can cause your home’s value to rise. Then, you can ask the lender to determine what your new loan to value is based upon the updated value.
Do Lenders Automatically Cancel the PMI on Your Loan?
Technically, your bank, or loan lender is required to cancel the PMI when the following occurs:
- Loan to Value (LTV) drops to 78% LTV. According to the federal Homeowners Protection Act of 1998 mortgage companies are required to terminate PMI, at no cost to the borrower.
Refinance Out of Your Mortgage with PMI
Home refinancing is probably the most common way borrowers get rid of paying mortgage insurance monthly. Of course, we suggest refinancing into a no PMI mortgage or a lender paid mortgage insurance option. In most cases, the interest rates on lender paid PMI loan is typically slightly higher, but if it eliminates paying mortgage insurance every month, it may be worth it. Before committing to a refinance loan, do the math and calculate whether you will save money with the proposed no PMI mortgage option, versus your current home loan and monthly mortgage insurance payment.
Other Requirements to Get Rid of Mortgage Insurance
The Consumer Financial Protection Bureau states that you have to do the following to cancel your PMI:
- You must request the canceling of PMI in writing.
- You must be current on your home payments and have a steady payment history. (no payments 30-days late in the last year and no 60-day late payments in the previous 2 years)
- You must prove that there are no other liens on the property, such as a home equity line of credit or second mortgage loan.
- You may need to get a new appraisal to show that the balance is not more than 78% of the value of the home. (A few lending companies say they allow a broker price opinion, ie. BPO)
If you are not able the first time to get the lender to cancel PMI, you may want to think about refinancing. Also, if you have an FHA loan and cannot get rid of PMI, you will need to eventually refinance to get out of those extra monthly payments. If you do refinance and the value of the home is high enough, the lender should not require private mortgage insurance. Is PMI still tax deductible?
Takeaways on Eliminating PMI and Getting Rid of Monthly Mortgage Insurance
Getting rid of PMI as soon as you can will get rid of a $100 to $200 or more monthly expense on top of your mortgage, insurance and real estate taxes. For the average home, PMI payments can cost $1,500 to $2,000 per year. Who would not want to get rid of that type of payment?
But remember, you will need to convince your lender that you have at least a 20% stake in your home. This usually means you will have to pay for a new appraisal. While that is an extra expense, it can save you up to $2,000 per year. Once you no longer have to pay PMI, you can take that money and hopefully invest it into something that will make you a nice profit.
References: How to Drop PMI. (2016). Retrieved from https://www.fool.com/mortgages/2017/04/16/how-to-drop-private-mortgage-insurance.aspx