How to Remove PMI From Your Loan

It’s not always possible to make a 20% down payment on a home loan, but if you pay less, you may be required to pay private mortgage insurance. The good news is, PMI can lower a cost barrier for prospective borrowers, allowing you to become a homeowner and begin building equity sooner.

Of course, that doesn’t mean PMI is always worth it. After all, it’s an added cost that doesn’t contribute to the equity in your home. Here’s how it works and how to get rid of PMI when you no longer need it.

[Read: Best Mortgage Lenders.]

How Private Mortgage Insurance Works

Private mortgage insurance is a type of financial protection mortgage lenders require when the borrower’s down payment isn’t large enough — usually 20% for a conventional loan. PMI could also be required if you refinance your mortgage with less than 20% equity built up. That’s because the smaller the down payment, the riskier the loan; the borrower has to take on a larger loan to cover the value of the home, resulting in a higher payment. And with little equity built up in the property, the lender can end up taking a loss if it turns out that the borrower can’t afford the loan.

“PMI is a type of mortgage insurance policy that provides compensation by the insurance company to the lender, in the event a borrower defaults on the mortgage,” says Laura M. Endres, an attorney focused on real estate law with Taylor, Eldridge & Endres in Smithtown, New York.

According to Endres, PMI doesn’t protect the borrower from having to pay the mortgage if she is unable to do so. “It is an insurance policy only for the lender and has no benefit to the borrower,” she says, “other than to allow a borrower who would not normally qualify for a mortgage to be approved for a mortgage.”

[Read: Best FHA Loans.]

Third-party private mortgage insurance companies generally provide PMI policies, and the lender arranges and tacks them onto the mortgage payment. You continue to pay PMI until you’ve built up enough equity in your home. Typically, lenders require a minimum loan-to-value ratio (the total amount borrowed divided by the value of the property) of 80% before PMI can be removed.

Say you purchased a home for $200,000. However, you only put down 10%, or $20,000. That means your LTV would be 90%, requiring you to pay PMI. Until you’ve made enough mortgage payments so that your balance reaches $160,000 — or your home is reappraised at a higher value — you will have to pay PMI.

On conventional mortgage loans, PMI generally ranges from 0.3% to 1.5% of the original loan amount each year, depending on your credit score and down payment. On a $200,000 mortgage, a 1% PMI fee would cost you $2,000 per year, or $167 per month.

[Read: Best Mortgage Refinance Lenders.]

How to Get Rid of PMI

PMI is an added cost that makes your mortgage more expensive, so you want to get rid of PMI payments as soon as possible.

1. Find out if you automatically qualify. The good news is that once you reach an LTV of 78% percent (or 22% percent equity in your home’s value at the time of purchase), your lender is required to automatically cancel PMI, even if you don’t formally request it. However, you should verify that the PMI has, in fact, been canceled as soon as you become eligible.

2. Meet the requirements. If you’re not in a position to have your PMI canceled automatically, you may be able to request it. First, you’ll have to meet a few requirements, including an 80% LTV in most cases. You must also be current on your mortgage payments and have a good payment history. The lender will need you to prove that there aren’t any other outstanding debts on your home, such as a second mortgage or lien. And the lender might require a home appraisal to ensure that the house hasn’t decreased below the original value. If it has, you might not have enough equity to cancel PMI.

3. Make the request. Once you’ve verified that you meet the requirement to have PMI canceled, you can make the request to your lender. This needs to be done in writing.

Government Loans and Mortgage Insurance

If you take out a mortgage through certain government programs, the rules on mortgage insurance differ.

Do FHA Loans Have PMI?

The Federal Housing Administration provides mortgage insurance on loans made by FHA-approved lenders. In fact, FHA mortgage borrowers can put down as little as 3.5%, depending on their credit score. However, FHA mortgage insurance is required for all FHA loans, regardless of down payment size or credit score.

FHA mortgage insurance comes in the form of both an upfront charge that’s paid along with other closing costs or rolled into the total loan amount, as well as a monthly fee that’s included in the mortgage payment. Usually, the only way to get rid of the mortgage insurance premium on an FHA loan is to refinance the loan with a non-FHA lender, according to Shawn Sidhu, branch manager and mortgage broker with C2 Financial Corp. of California.

Do USDA Loans Have PMI?

Mortgage loans backed by the U.S. Department of Agriculture require mortgage insurance in the form of both an upfront fee and a monthly payment. And like FHA loans, you can roll the upfront portion into your mortgage instead of paying it at closing, but doing that increases the size of your loan and, therefore, the monthly payment and total interest paid.

DO VA Loans Have PMI?

U.S. Department of Veterans Affairs loans don’t require a monthly mortgage insurance premium, but they do typically require an upfront VA funding fee that varies depending on your type of military service, down payment amount and other factors. Like other government-backed loans, you may roll that fee into your mortgage or pay it at closing. “There are instances where a veteran may be exempt from the VA funding fee, typically due to a service-related disability,” Endres says.

How to Cancel PMI Early?

There are a couple of instances when you might be able to get rid of PMI ahead of schedule.

If your home has appreciated in value. You could request to cancel PMI if your property has appreciated significantly, according to Sidhu. In this case, you might not have made many mortgage payments, but the LTV still decreased to an acceptable level, thanks to the increased equity in the home.

If you’ve made extra mortgage payments. By paying down your mortgage aggressively and making larger or extra payments, you’ll speed up the timeline to reaching 80% LTV. Of course, you’ll need to consider whether putting extra funds toward your mortgage is more financially advantageous than other options, such as investing in the market.

If you meet certain conditions. Although mortgage insurance premiums are required for the entire term of FHA loans in many cases, Endres points out that there are a couple of instances in which you can get it canceled. If you took out your mortgage between Dec. 31, 2000, and June 3, 2013, and the LTV is 78% or less, you can contact the lender and request to have the mortgage insurance removed. If you took out the mortgage after June 3, 2013, and put more than 10% down, the mortgage insurance can be removed after 11 years.

“Cessation of PMI is dependent on other factors, such as a good payment history,” Endres says. She encourages borrowers to understand their rights regarding what date they may ask for the PMI to be terminated and to make sure it’s on their calendars.

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How to Remove PMI From Your Loan originally appeared on usnews.com

Update 07/26/22:

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