Wondering how to remove PMI? Here’s a helpful guide to eliminating private mortgage insurance! Got a PMI? You must be counting down the days until it’s a thing of the past!
While PMI or Private Mortgage Insurance does help you buy a home when you are short of funds, you are also stuck with an extra bill each month on top of your regular mortgage payments.
In the past six decades, more than 38 million Americans have taken on PMI to secure a home, and it is safe to assume that everyone wants to drop off this pesky add-on. So, in this post, I will discuss how you can get rid of PMI for good!
What is PMI?
PMI or Private Mortgage Insurance is a crucial aspect of securing a mortgage, especially when you don’t have a substantial down payment.
You need a PMI if you get a conventional mortgage and put down less than 20% to buy a home or have less than 20% equity when refinancing.
The payments are typically paid monthly and are included in your overall mortgage payment.
Unlike homeowner’s insurance which protects you, PMI protects the mortgage lender or bank in case you can’t pay your mortgage.
Essentially, it’s like a safety net for banks, which covers a portion of what you owe when you default on your loan.
It’s important to note that PMI does not stop you from facing foreclosure or having your credit score drop if you fall behind on mortgage payments. So, while it helps you get a loan with a lower down payment, it primarily only protects lender’s interests.
You are required to obtain PMI on a conventional loan if you are purchasing a home with less than a 20% down payment or refinancing with less than 20% equity in the property. Homebuyers with a traditional 80/20 mortgage where 80% of the purchase price is financed and a 20% down payment is made can avoid PMI.
How Much is PMI?
Before we proceed, it is important to understand the cost involved in PMI. Your Private mortgage insurance PMI can vary depending on the following key factors:
- Loan Size: PMI cost depends on the size of your mortgage loan; larger loans generally mean higher PMI payments.
- Down Payment: The amount of your down payment impacts PMI cost; larger down payments typically result in lower PMI payments.
- Credit Score: Your credit score influences PMI rates; higher scores generally mean lower PMI premiums, with the most favorable rates often for scores of 760 or above.
- Type of Mortgage: The type of mortgage you choose affects PMI costs; adjustable-rate mortgages may have higher PMI premiums compared to fixed-rate mortgages.
It is essential to estimate the cost of PMI before finalizing your mortgage to determine affordability and make informed decisions.
When Does PMI Go Away?
So, when does PMI actually go away?
The Homeowners Protection Act of 1998 says that lenders have to stop PMI when your loan-to-value ratio, i.e., how much you owe compared to your home’s value), is 78%. In other words, PMI disappears once you have paid back 78% of your loan.
For example, if your house costs $250,000, PMI stops when you owe $195,000 on your loan.
Other than this, it can also be removed from the mortgage when you are about halfway through your loan time, like 15 years for a 30-year mortgage plan.
Also, remember, your PMI changes as you pay back your loan. So, you pay less until it’s all gone. Keep an eye on your loan balance, and you’ll see your PMI shrinking until it disappears completely.
How to Get Rid of PMI?
Now that we have discussed the basics of PMI, let’s see how you can remove it from the mortgage. One of the best time to refinance a home is when you have the ability to eliminate private mortgage insurance.
Here are four different ways to get rid of PMI:
Wait For the Termination of PMI
One of the easiest ways to get rid of PMI is to wait for its automatic termination, as mandated by the Homeowners Protection Act (HPA) of 1998. According to this law, once your mortgage balance reaches 78% of the original home value, or you reach the midpoint of your loan term, your lender must cancel the PMI.
This termination is automatic if you are current on your payments.
To calculate when you’ll reach the 78% threshold, you can use the original amortization schedule provided at the start of your loan. Additionally, if you have made extra payments or your home has appreciated, you may reach this threshold sooner.
To ensure your lender complies with the HPA, monitor your loan balance and contact them if you believe you have reached the termination point. Keeping detailed records of your payments and communicating with your lender can help ensure a smooth process for eliminating PMI.
It is important to note that HPA does not apply to all mortgages. Some loans, especially those considered high-risk, may have different rules for PMI termination. Additionally, if your loan is backed by the Federal Housing Administration (FHA), termination rules differ, and you may need to refinance to remove PMI.
Request PMI Cancellation
To get rid of PMI sooner, you can also request its cancellation once your mortgage balance hits 80% of the original home value. We suggest you request PMI cancellation when you are at or below the 80% LTV ratio,
This original value is determined by the lower of the purchase price or the appraised value when you bought the home. Whereas, if you refinanced, it’s the appraised value at the time of refinancing.
All you have to do is track your progress using your PMI schedule based on the home’s original value. Then, make a written request to your mortgage servicer a few months before reaching the 80% loan-to-value (LTV) ratio.
You can calculate your LTV by dividing the loan balance by the original purchase price. Use a mortgage amortization calculator to estimate when you will hit the 80% LTV., especially if you are making extra payments to reduce the principal balance.
To qualify for cancellation, ensure you have a good payment history with no late payments in the past 12 months, as well as no 60-day late payments in the previous 24 months. Your mortgage must be the only debt on the home, and you may also need to provide proof of the home’s value through an appraisal or broker price opinion.
You can usually eliminate PMI when market conditions result in a substantial rise in your home’s value. This involves requesting removal from your lender and arranging for a new appraisal. The appraisal verifies that your property’s value has increased sufficiently for you to possess the necessary equity.
Get a New Appraisal
Another method to eliminate PMI is by obtaining a new appraisal for your home.
As your property’s value increases over time, you may reach the 80% loan-to-value (LTV) ratio sooner than expected. When your mortgage balance approaches this threshold, consider hiring a licensed appraiser to assess your home’s current value.
Once you receive a favorable appraisal showing that your home’s value has increased significantly, submit this documentation to your mortgage servicer. They will use the new appraisal to recalculate your LTV ratio.
If the ratio falls below 80%, your mortgage servicer may agree to cancel PMI without the need to reach the 78% LTV threshold.
It’s important to note that the cost of the new appraisal typically falls on you as the homeowner. However, the potential savings from early PMI termination can outweigh this expense, especially if your home’s value has appreciated substantially since you purchased it.
Always communicate with your mortgage servicer throughout this process to ensure compliance with their PMI cancellation policies.
Refinance Your Mortgage
Another option to remove PMI is through refinancing your mortgage.
When you refinance, you take out a new loan to replace your existing mortgage. If your home’s value has increased significantly since you purchased it, you may qualify for a new loan-to-value (LTV) ratio, allowing you to avoid PMI altogether.
Also, note that refinancing may offer other benefits beyond PMI removal such as securing a lower interest rate or adjusting your loan term.
To refinance successfully, your new loan should cover at least 80% of your home’s current value, ensuring you have a favorable LTV ratio.
Keep in mind that refinancing involves closing costs and fees, so it is essential to also weigh these expenses against the potential savings from PMI elimination. Therefore, before you proceed with refinancing, carefully consider your financial situation and consult with mortgage professionals to determine if it’s the right choice for you.
More Tips on Removing PMI
While Private Mortgage Insurance, or PMI enables homeownerships with lower down payments, its costs can add up over time.
This extra expense often amounts to hundreds of dollars annually and is therefore a major problem.
Eliminating PMI can free up funds for other investments.
So, use the four ways I mentioned in the guide to help get rid of PMI and reduce your overall cost of homeownership.
Best Ways to Eliminate PMI:
- Await automatic or final PMI termination eligibility.
- Ask for PMI cancellation once your mortgage balance hits 80 percent.
- Accelerate your mortgage payments to reduce the balance.
- Consider refinancing your mortgage.
- Opt for a home reappraisal.
- Enhance or renovate your property to boost its value.
Frequently Asked Questions on PMI
How do I clear my PMI?
To clear PMI, pay down your loan balance to 80% of your home’s original value. Once you reach this point, request cancellation from your lender. It is crucial to monitor your payments and home value to ensure the timely removal of PMI.
Typically, eliminating mortgage insurance proves beneficial as it reduces your monthly payments. However, it’s essential to conduct thorough research before reaching a decision. Depending on the method you use to remove your mortgage insurance, additional factors like refinancing costs may need consideration.
How is PMI calculated?
PMI is calculated based on a small percentage of the loan amount, known as the PMI rate. Your lender determines the PMI payment by multiplying your loan amount by the PMI rate and dividing the result by 12, which results in your monthly PMI payment.
How to avoid PMI?
To entirely avoid PMI, you can go for FHA house loans. These loans, backed by the Federal Housing Association, typically require lower down payments than conventional loans, and may not mandate PMI. However, be aware that FHA loans often come with their own set of requirements and fees.
Is PMI difficult to get removed?
Several government sponsored enterprises, including Fannie Mae, enforce a two-year “seasoning requirement,” which mandates two years’ worth of punctual payments before PMI removal regardless of exceeding 20% equity growth. Moreover, if the period is less than five years, a 25% equity threshold might be mandatory.
Always ask for the latest updates from Fannie Mae, Freddie Mac and FHA in regards to the rules for removing PMI as the requirements change frequently.
Is PMI tax deductible?
Consumers are always asking, is private mortgage insurance tax-deductible? Unfortunately, private mortgage insurance is not tax-deductible. The deduction for mortgage insurance was reinstated for eligible homeowners for the tax years 2018, 2019, 2020, and 2021 but has not been extended for the tax years 2023 and 2024.
