Depending on the type of loan that you have and the amount of equity you have in your home, your monthly mortgage amount may include Private Mortgage Insurance (PMI). PMI helps protect the lender if you stop making payments or go into default on your mortgage. If you are paying PMI on your mortgage, you may be wondering how to get rid of PMI. The good news is that, depending on your situation, you may be able to stop paying PMI and lower your overall monthly mortgage payment.
What Is Private Mortgage Insurance (PMI)
Private Mortgage Insurance (PMI) is an insurance policy that protects the lender in case of default. While there are a variety of ways that PMI is charged, often it is included as an additional monthly payment. PMI is not always required on all mortgages — usually it is required if you are purchasing or refinancing a home with a conventional loan and are making a down payment of less than 20% or have overall home equity of less than 20%.
Why Does PMI Exist?
There are a variety of different types of mortgage insurance, and most of them are to protect the lender. That is also the case with Private Mortgage Insurance — while every lender and loan program is different, usually PMI is assessed if you have less than 20% equity in your home. PMI exists to protect the lender in case you stop making the payments on your loan. A study by the Center for Responsible Lending showed that the default rate for loans with a down payment less than 10 percent was 45% higher than the default rate for mortgages with a higher down payment. The PMI premiums that you pay with a lesser down payment amount help offset the higher risk of default that comes with a lower down payment.
FHA Loan Mortgage Insurance
It’s important to note that Private Mortgage Insurance is typically only assessed when taking out a conventional loan. If you are taking out an FHA loan, you can often put down a much lower down payment, but you’ll also pay an FHA Mortgage Insurance Premium (MIP). There is an upfront and annual MIP component. As an example, if you buy a $400,000 home and put down 4% ($16,000), you’ll pay $6,720 in upfront MIP and an extra $272 in MIP each month. There are pros and cons to both FHA loans and conventional loans, so make sure you understand them to make the best choice for your individual situation.
4 Ways To Get Rid of PMI
If you are paying monthly PMI premiums on your mortgage, there are a few ways that you can get rid of that pesky PMI payment:
Request PMI cancellation
The Homeowners Protection Act gives you the right to remove PMI on the date where the amount that you owe on the mortgage falls below 80 percent of the original value of the home. You should have received a PMI disclosure form at closing that states when this date is. If you’re not sure, contact your mortgage servicer for that information.
Make additional principal payments
If you don’t want to wait until you reach the original 80 percent date, you can make additional principal payments to your mortgage. Once your mortgage balance drops below 80 percent of your home’s original value, you can contact your mortgage servicer to cancel the PMI payment on your loan.
Take advantage of automatic PMI termination
Both of the above methods require that you proactively contact your mortgage servicer. If you don’t contact your servicer, you may still be able to take advantage of automatic PMI termination. According to the federal Homeowners Protection Act, mortgage servicers are required to automatically terminate PMI after your mortgage principal balance falls below 78 percent of your home’s original value.
Request a new appraisal
If your home’s value has increased since you originally took out your loan, it’s possible that you may be able to cancel PMI by ordering a new appraisal. Before paying for an appraisal, make sure you understand your lender’s guidelines. Some lenders may require you to reach a certain loan-to-value (LTV) amount in relation to your home’s value, or require you to use a specific appraiser.
The Bottom Line
PMI or Private Mortgage Insurance is insurance that may be required by your lender, especially if you are making a down payment of less than 20 percent of your home’s value. It is common for PMI to be included as an additional amount on your regular monthly mortgage payment. If you’re looking to get rid of PMI, you have a few options. You can wait for your mortgage’s principal balance to fall below 80 percent of the home’s original value, make additional payments or request a new appraisal if you feel that your home’s value has increased. Explore the different options to see which might be right for your specific financial situation.