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For many home buyers, private mortgage insurance is an unavoidable expense. PMI protects your lender in the event of your mortgage default and typically increases your monthly mortgage payment.
The good news is, you don’t have to pay PMI forever. You can remove the PMI from your mortgage in different ways, like refinancing. With today’s historically low mortgage interest rates, the time may be right for you to lock in a lower rate and save hundreds of dollars by removing the PMI.
What is the PMI?
Private mortgage insurance, commonly known as PMI, is a type of insurance that protects your lender in the event that you cannot make your monthly payments. It is usually required on conventional loans when you make a down payment of less than 20%. You will make monthly PMI payments until you reach 20% of your home equity. When this happens, you can ask your lender to waive private mortgage insurance.
Other types of loans also come with mortgage insurance. For example, FHA loans (administered by the Federal Housing Administration) charge a mortgage insurance premium, often referred to as a MIP, that you pay when your loan closes and annually thereafter as long as you have the loan.
While the PMI is meant to protect the lender, it indirectly helps homebuyers. Because of the security that PMI offers, you can often buy a home with as little as 3% down on a conventional loan. About 40% of all mortgages made by government sponsored entities Fannie Mae and Freddie Mac have private mortgage insurance, according to the Urban Institute.
If you are looking for a mortgage, Credible allows you to compare mortgage rates.
How much does PMI cost?
Private mortgage insurance is typically charged as a percentage of the loan amount, which typically ranges from 0.5% to 1.5% per year. This equates to a PMI rate of $ 1,000 to $ 3,000 on a mortgage loan of $ 200,000. The specific cost of the PMI depends on things like:
- The amount of your deposit
- Your credit history
- The type of loan you choose
- The duration of your loan
Usually, you will pay your PMI premium every month, with the cost included in the total amount you send to your lender. This is in addition to the principal and interest payment you make, as well as a portion of taxes and fees. But some lenders may offer a one-time, up-front private mortgage insurance premium that you pay at closing. In some cases, you may be offered an initial premium as well as monthly premiums.
How to remove PMI
If you are ready to finish paying the PMI on a conventional loan, there are a number of ways you can cancel it. The methods below apply only to private mortgage insurance on conventional loans. The rules are different for mortgage insurance on government loans, such as FHA loans.
Wait until PMI is automatically canceled
By law, your lender must automatically terminate your private mortgage insurance once you reach 22% of your home equity, based on your loan repayment schedule and the home’s original value. You will need to be completely up to date on your payments for this to happen.
Your PMI will also be automatically canceled once your loan hits its midpoint, such as after 15 years of a 30-year mortgage. This is true even if you haven’t hit the 22% mark of your home equity.
Request cancellation of the PMI
You can request termination of the PMI from your lender once you reach 20% of the equity in your home through your monthly mortgage payment, based on the original value of your home when you took out the loan. Your lender is required to tell you when this is due.
You must make your request in writing and have a good payment history (all payments must be up to date). Your lender may ask you to prove that your home has not lost value and may also require that there be no lien or second mortgage on the property.
Get a new home appraisal
Increasing home values can help you hit the magic 20% equity mark faster. Since equity is the difference between what you owe on your home and its value, any home appreciation will increase that gap. Your lender may take this into account and approve a PMI cancellation request based on your home’s current value, but will likely require a professional appraisal to verify your home’s value. Your new appraisal value will be taken into account in the calculation of shareholders’ equity.
Refinance to remove PMI
You can also refinance your loan and take out a new mortgage without a PMI. You will need to have 20% equity in your home, of course. As part of a mortgage refinance, your lender will usually ask for a new appraisal that will help you take advantage of the appreciation in the price of the home. Just be aware that if you are considering a cash refinance, all the money you take out of the house will reduce the total amount of equity you have.
Credible allows you compare mortgage rates to see if refinancing makes sense for you.
Can you avoid PMI?
While private mortgage insurance can be of great help to borrowers purchasing a home, there are ways to completely avoid paying PMI. Here are just a few:
Put 20% or more down
The easiest way to avoid PMI is to put down 20% or more on your home. It’s easier said than done, especially if you’re buying your first home. But you can factor that into your budget, save more money, or buy a cheaper home if you want to avoid PMI.
Mortgages without PMI
Some lenders offer low down payment mortgages with no PMI. This can be part of a first-time home buying program or a special program with its own qualification requirements. It is worth asking. Military service members or veterans may also consider a VA loan, which does not include mortgage insurance, although you will usually have to pay an upfront closing fee.
The PMI only applies to conventional loans. Government guaranteed loans follow their own rules. If you are a military or veteran, you may want to consider a VA loan, which does not require mortgage insurance. FHA and USDA loans require mortgage insurance, which cannot be canceled. You’ll have to refinance your loan to another guy to get out.
Know your PMI rights
Most of the rules around private mortgage insurance were set out in the Federal Homeowners Protection Act 1998. They apply to all loans issued as of July 29, 1999.
The law gives rights to owners, including the automatic cancellation of the PMI mentioned above. Lenders are also required to notify you of the cancellation of the PMI when the mortgage is closed and annually thereafter. They should also give you a phone number that you can call to inquire about canceling the PMI. When your PMI is canceled, they must notify you in writing and let you know that you have no more premiums to pay.
Before accepting a conventional mortgage, ask your loan officer for a detailed explanation of private mortgage insurance requirements, how it will be paid, and any other rules that apply. If you think your lender is not following the PMI removal rules, you can file a complaint with the Federal Consumer Financial Protection Bureau.
If you’re ready to shop around for a mortgage, compare mortgage rates using Credible.