How To Get Rid Of PMI

Private mortgage insurance (PMI) is a type of insurance that protects your lender if you stop making your mortgage payments. You will typically pay PMI if you don't meet a certain level of equity in a home you purchase. If you must pay PMI, it will typically cost you 0.2% – 2% of your loan amount per year as a part of your mortgage payment.

PMI doesn't benefit borrowers, so it's in your best interest to either save up enough money to put toward your down payment or build your home equity so you don't have to continue to pay PMI. Luckily, even if you make your mortgage payments month-by-month, you won't have to pay PMI forever. In some cases, you can even get rid of it early.

When PMI Is Required

Private mortgage insurance (PMI) is usually required for any conventional mortgage loan until borrowers have at least 20% home equity. It commonly works like this: Conventional loan borrowers pay PMI in exchange for a down payment of less than 20% of the home's purchase price.

For example, if you only put 15% down on a home loan, you'll have to pay PMI as part of your mortgage payment until you reach 20% equity in your home. In contrast, putting 20% down means you won't have to pay PMI.

You may hear of other types of mortgage insurance, such as with FHA loans. Keep in mind that these are not the same as PMI. The Federal Housing Administration backs FHA loans, and you must pay a mortgage insurance premium (MIP), an additional payment to secure your loan. In this case, with an FHA loan you must pay for MIP at closing and then each month over the life of your loan if you put less than 10% down. If you put at least 10% down on an FHA loan, you’ll pay MIP for 11 years.

Ways To Get Rid Of PMI

There are multiple ways in which PMI can be canceled, either by the borrower or the lender. Homeowners can simply wait, get a new appraisal, refinance or pay extra toward their loan to cancel PMI.

Method One: Simply Wait

This is a simple method: Make your regular monthly payments until the lender must legally cancel the PMI. This can happen to you in two situations:

• When your mortgage principal balance reaches 78% of the purchase price of the home.
• When you reach the halfway point of the mortgage (i.e., 7 1/2 years for a 15-year mortgage).

This method can work for you if you don't plan to quickly build equity in your home.

Method Two: Get A New Appraisal

Believe it or not, you may want to consider getting a home appraisal. Getting a new home appraisal may show that the house’s value has increased since closing, allowing the borrower to cancel PMI early.

A home appraisal occurs when a licensed real estate appraiser determines the fair market value of a home. An appraiser will do this by taking any defects of the home into account, as well as the size of the property and a larger-picture overview of the home. If an appraisal comes in and determines that your home is worth more than it was originally appraised for, you may automatically "earn" more equity in the home.

Method Three: Refinance

A refinance could help a borrower get rid of PMI sooner than they initially expected. Refinancing means a lender gives you a new mortgage in place of your old mortgage. You can often get a new interest rate or a lower monthly payment to refinance, often called a rate-and-term refinance.

You can also choose a cash-out refinance, where you tap into your home equity, by taking out up to 80% of your home value. You can replace your old mortgage with a larger mortgage and take out the difference in cash.

You can also refinance your mortgage to consolidate high-interest debt and eliminate your PMI if you have enough home equity.

Method Four: Pay Extra Toward Principal

Finally, consider paying extra toward your mortgage principal to reach the 78% mark of your home’s purchase price. You can contact your loan servicer for more information about the amount you must pay toward your principal balance so you can cancel PMI.

There are many benefits of paying extra toward your home's principal, including saving money over time by shortening the "lifespan" of your loan. You'll cut down on the total interest you'll need to pay on your loan.

Getting Rid Of PMI: Step-By-Step

When does PMI go away? Here's how to get rid of PMI on a mortgage loan.

But first, let's take a quick look at lender-paid mortgage insurance (LPMI) and borrower-paid mortgage insurance (BPMI). LPMI refers to when the lender pays the mortgage insurance for the borrower. In this case, they incorporate the cost into their overall interest rate or loan structure.

BPMI is the most common PMI type, which means an insurance premium gets added to your monthly payment. You pay the insurance premium automatically every month.

1. Make mortgage payments: It's important to stay current on your mortgage while you build toward 20% home equity. You can also put any extra money you have toward your principal to build equity faster. Missing payments can result in delays to have PMI removed because you need to be current on mortgage payments for your servicer to cancel PMI.
2. Contact your lender: After reaching the appropriate amount of equity, contact your lender to have the PMI removed. Follow any required steps your lender asks to ensure this occurs.
3. Request a statement: Finally, request a monthly mortgage statement after removing PMI. The amount you pay should be lower, showing that the PMI has, in fact, been removed.

As you can see, it seems fairly simple to get rid of PMI. Your loan servicer can answer any specific questions about how to make it happen.

PMI Removal FAQs

Let's look at some frequently asked PMI removal questions so you get all your questions answered.

How do you avoid PMI?

So, how to avoid PMI altogether?

You can avoid PMI by putting down a down payment of more than 20% of your overall home loan. Consider saving more money before purchasing a home so you won't have to pay PMI. It will save you money over the long term because you put your money toward home equity and save yourself from paying extra toward your mortgage each month.

Is it worth removing PMI?

Yes, it's worth removing PMI because your monthly payments will go down. PMI doesn't benefit you – it benefits your lender/the owners of your mortgage. Therefore, it's worth doing what you can to get rid of PMI.

How many years does it take to remove PMI?

Your servicer must cancel PMI on the date when your principal balance reaches 78% of the home’s purchase price. There is no universal date for cancellation – it all depends on how soon you reach the required percentage.

However, consider keeping an eye on your equity amount, and in particular, know the date the principal balance of your mortgage is scheduled to equate to 80% of the home's original value.

Where can you find this date? Look at your PMI disclosure form, which you received with your mortgage documents. Your servicer can help you locate the exact date if you aren't sure.

The Bottom Line

PMI is often required if you put down less than 20% for your home loan, and it can become quite expensive over time.

Putting down less than 20% – even 19% – can result in you having to pay PMI as part of your mortgage payment every month. Putting 20% down means you won't have to pay for this extra monthly insurance for your lender.

However, if you have to pay PMI, it's not the end of the world, particularly because it doesn't last forever and you can pay it off early.

Once you reach 20% equity, you can quit paying PMI, so contact your lender. Consider not waiting until it "goes away" at 78%, because you'll have to pay PMI for a longer time. Your loan servicer can walk you through this process if you have more questions about how to get rid of PMI. 

Ready to get rid of PMI in your current home? Check out refinance options with Rocket Mortgage^®.