Private mortgage insurance is special insurance a lender requires borrowers to carry when they borrow more than a certain percentage of a home’s value. Typically, lenders require PMI if the loan-to-value ratio is more than 80 percent.
Your LTV ratio is simply the amount of your loan compared to the purchase price or home appraisal value. For example, a $300,000 home with a $240,000 mortgage balance would have an 80 percent LTV. If you borrowed more than $240,000, you’d likely have to pay PMI. To estimate how much your PMI payment will be, use a PMI calculator.
Related: 6 Things You Need to Know About PMI
How to Cancel PMI
PMI protects lenders against borrowers who default on loans. “Paying private mortgage insurance is essentially the equivalent to throwing your hard-earned money in the trash,” said Than Merrill, real estate expert and CEO of real estate education site FortuneBuilders. “A mortgage payment is stressful enough, and the last thing you want is [to] couple that with an additional payment.”
If you’re wondering, “When can I stop paying mortgage insurance?” — read on to find out how to get rid of mortgage insurance.
1. Automatic Termination
According to the Homeowners Protection Act of 1998, lenders must drop your PMI once your LTV reaches 78 percent. So, if you bought your home for $300,000 and you currently owe $234,000 on it, the law requires your lender to cancel your PMI. Remember, your LTV is the amount of your mortgage balance in relation to your home’s value at the time when you purchased it.
Automatic termination is not subject to fluctuations in home values, according to the Consumer Financial Protection Bureau. This means that even if your property has fallen in value, the automatic termination date would occur when your principal balance is first scheduled to reach 78 percent LTV. This is the easiest answer on how to remove PMI, but keep in mind that you must be current on your payments for this to happen.
2. Requested Termination
Removing PMI is possible if you request it via a PMI cancellation letter when you reach an 80 percent LTV on your home loan. “It is up to the bank, however, to approve your request for removing mortgage insurance,” said Ray Rodriguez, regional sales manager at TD Bank.
In addition to the 80 percent LTV threshold, there are other requirements for terminating PMI, according to the CFPB:
- The borrower must have a good payment history and be current on payments.
- The borrower must satisfy any lender requirement for certification that the equity in the property is not subject to a subordinate lien.
- The borrower must satisfy any lender requirement for evidence that the value of the property has not declined below its original value.
3. Final Termination
Final termination requires the lender to cancel your PMI at the midpoint of your mortgage term, according to the CFPB. “So, if you have a 30-year, fixed loan, your PMI would be terminated after 15 years, even if you haven’t reached that 20 percent equity mark,” explained Merrill.
“Of the ways to get out of paying PMI, refinancing your mortgage is the most common,” said Merrill, “Refinancing is a win-win situation because it allows homeowners to get rid of their PMI and helps them to reduce their monthly interest payment.”
But to get out of PMI payments, and to be likely to qualify for refinancing, your LTV must be 80 percent or less, said Merrill.
5. Get a New Appraisal
If you feel your home has increased greatly in value since you bought it, it might be worth getting a reappraisal to remove PMI. Of course, the home appraisal would have to verify that you now have an LTV of 80 percent or less.
Because this would be a request to cancel PMI, all the requested termination requirements would apply. “You should contact your lender first to see if he’ll consider canceling your PMI,” said Rodriguez.
6. Remodel or Renovate Your Home
If your lender will consider dropping your PMI with an adjusted valuation of your home, you could increase the value of your home through remodeling or renovation.
This, of course, is a big and expensive move — and the value of home modifications is not a certainty — so make sure you’re doing it for reasons other than just getting rid of your PMI.
7. Pay Down the Principal
You could also pay down your principal by making extra payments each month until you reach that 80 percent or lower LTV. To calculate LTV — and how much you’ll save by making extra payments — you can use a mortgage calculator.
Homeownership is costly enough without PMI, which exists only to protect your lender and does nothing to benefit you. Fortunately, you can leverage these easy ways to get rid of it.