How to Get Rid of Private Mortgage Insurance (PMI)
Searching for ways on how to get rid of Private Mortgage Insurance (PMI)? You've come to the right place. Below we will offer 7 tips to help you understand how Private Mortgage Insurance (PMI) works and how to get it removed from your home loan!
Many people may be wondering what is mortgage insurance when they first connect with a lender and you're not alone.
When buying a home for the first time, buyers are often surprised to learn that there are several additional costs that go into the home purchasing process beyond just the mortgage payment. Private mortgage insurance, or PMI for short, is one of the fees that may be associated with your home purchase, depending on the amount you include in your down payment. Private mortgage insurance is only required if the individual is putting less than twenty percent down on their home purchase. For those who plan on putting down twenty percent or more, private mortgage insurance will not apply.
Sometimes the only way someone can get a mortgage preapproval is if they are putting down less than twenty percent and in that scenario, private mortgage insurance will cover the rest.
If you are currently paying for private mortgage insurance, or you are on the hunt for a new home and are just learning about private mortgage insurance, this article will delve into what private mortgage insurance is, how to get rid of it, and how to avoid it altogether.
What is Private Mortgage Insurance (PMI)?
Private mortgage insurance is a fee paid by borrowers to protect the lender in the event the homeowner defaults on their loan. Private mortgage insurance only applies to those who put down twenty percent or less when buying a home; buyers who put down twenty percent or more are not responsible for paying private mortgage insurance. Mortgage lenders typically consider homeowners who put down less than twenty percent to be riskier borrowers when compared to those who put down twenty percent or more. In the event that the borrower defaults and is no longer able to meet their mortgage payments, the lender can fall back on the private mortgage insurance the homeowner has been paying from the time they initially purchased the home.
How to Get Rid of Private Mortgage Insurance (PMI):
1. Pay Down Your Mortgage
Homeowners can request to have private mortgage insurance removed when they attain 80 percent equity in their homes. Alternatively, private mortgage insurance may automatically terminate on its own when you reach 78 percent home equity.
When you have reached 20 percent equity in your home, you will most likely have to write a letter to your lender requesting the cancellation of the private mortgage insurance. If you are up to date on your mortgage payments and have a strong payment history, you most likely will not have much trouble having the private mortgage insurance canceled. However, if you have had a spotty history and have missed several payments in the past, your lender may not be able to cancel the private mortgage insurance right away.
In addition to reviewing your payment history, the lender will also most likely check to ensure there aren’t any other liens on the home, along with any other requirements included in the original agreement when you obtained the loan.
Some mortgage lenders might also require a home appraisal prior to terminating the private mortgage insurance. In doing so, they are checking to ensure that your home’s value is still the same or higher than what it was when you initially purchased the property. In the event your home’s value has declined, you may not be able to cancel the private mortgage insurance right away.
The sooner you pay down your mortgage, the faster you will eliminate the added expense of private mortgage insurance. Even putting an extra $40 or $50 per month towards your mortgage can make a significant difference in eliminating private mortgage insurance. Using a portion of your bonus payments or some other additional cash that comes in each year can also be used to make large lump-sum payments toward your loan each year.
2. Home Value Increases
If you live in an area with home values that are rising quickly, it is possible that your home value has increased so much it has pushed your home out of the range required for private mortgage insurance. However, to cancel private mortgage insurance based on your home’s current value, you will be required to have a loan to value ratio of 75 percent and will have had to own your home for at least two years.
This might also apply if you have made significant changes to your home, such as renovating your kitchen, bathroom, or basement. If your home is located in an area with rising home values and/or you have made significant upgrades, speak with your mortgage lender about eliminating private mortgage insurance. Your mortgage lender may require a new appraisal, which you will most likely have to pay for. Appraisals typically tend to run between $300 and $500. Other mortgage lenders allow broker price opinions, which is typically a cheaper and faster option when compared to an appraisal.
3. Reach the Halfway Point in Your Loan Cycle
Typically referred to as “final termination,” mortgage lenders are required to end private mortgage insurance when you reach the halfway point in your loan. For example, if you have a loan with a 30-year amortization rate, your lender is required to end the private mortgage insurance when you reach 15 years in your loan cycle. This applies even if you have not yet reached 78 percent home equity.
4. Refinance Your Loan
If mortgage rates have dropped, it might be a good time to refinance your mortgage. In doing so, you could save a considerable amount in interest payments. Beyond that, you might also increase the equity you have in your home, leading to eliminating private mortgage insurance faster. If you choose to refinance your mortgage, you will have to pay closing costs to do so. Weigh the closing costs against the number of private mortgage insurance payments you have left to determine which option is more cost effective. If you have owned your home for less than two years, you may encounter some pushback from your lender when refinancing in an effort to eliminate the private mortgage insurance. Additionally, ensure that home values in your area are on the rise when you choose to refinance, as refinancing a property when the home value has declined could actually add even more private mortgage insurance to your home.
How to Get Rid of Private Mortgage Insurance on an FHA Loan:
An FHA loan, or Federal Housing Administration loan, is insured by the United States Federal Housing Administration. FHA loans are among the few loan types that do not require private mortgage insurance, but they do require that mortgage insurance premium (MIP) be paid instead, in addition to a one-time, up-front mortgage insurance premium payment. Mortgage insurance premium is usually required for the life of the loan, unless you put down 10 percent. If you put down 10 percent, you will be responsible for paying mortgage insurance premium for 11 years. Similarly to private mortgage insurance, mortgage insurance premium is used to protect the lender in the event you default on your loan.
After attaining 20 percent equity in the home, mortgage insurance premium doesn’t fall off automatically. To remove the mortgage insurance premium from the loan after reaching 20 percent equity, you will have to refinance into a different mortgage program. This typically means refinancing into a conventional loan that doesn’t have private mortgage insurance.
Alternatively, if you obtained an FHA loan prior to June 2013 and have a 78 percent loan to value (LTV) ratio or lower, you may be eligible for mortgage premium insurance elimination, as older FHA loans can have the MIP removed after five years.
How Can I Get Rid of Private Mortgage Insurance Without Putting 20 Percent Down?
Putting down 20 percent of the purchase price can be a hefty amount, especially for first time homebuyers. Although private mortgage insurance is difficult to avoid when less than 20 percent is put down on a home, it is not impossible to avoid it altogether.
1. Find a Loan Program that Doesn’t Require Private Mortgage Insurance
The first way to avoid private mortgage insurance without putting 20 percent down is by opting for a loan program that doesn’t require private mortgage insurance, such as an FHA or VA loan. While other fees will be involved in these loan types, you won’t be paying for private mortgage insurance.
2. Use Lender Paid Mortgage Insurance
Alternatively, you can also find a lender that offers lender paid mortgage insurance (LPMI). With lender paid mortgage insurance, the lender pays for the private mortgage insurance. However, LPMI typically involves a higher interest rate, so be sure to compare both options prior to agreeing to it, as paying for the private mortgage insurance might be the cheaper option.
3. Obtain an 80/10/10 Loan (also known as a “Piggyback Loan”)
Another option is taking out two separate mortgages to have the funds needed to put down 20 percent on the home. This option is typically referred to as a “piggyback mortgage” or an “80/10/10 loan.” Here’s how that works:
The first mortgage covers 80 percent of the home price, while the second mortgage covers 20 percent. 10 percent of the second mortgage can cover the mortgage itself, while the remaining 10 percent covers the down payment. In the first loan, the 80 percent portion is typically a fixed-rate mortgage spanning 30 years while the remaining 10 percent is a home equity line of credit.
As with any option that seems too good to be true, there are some downsides to the 80/10/10 or piggyback loan. For one thing, because you are applying for two loans at once, you will have to qualify for both the mortgage and the home equity line of credit, which can be difficult depending on the situation. Additionally, taking out a home equity line of credit comes at a higher interest rate, so it may be cheaper to pay for the private mortgage insurance depending on what the interest rate is.
To qualify for an 80/10/10 loan, you will need strong credit, stable income/employment history, a debt-to-income ratio that doesn’t exceed 43 percent, and a down payment of 10 percent. The first mortgage might not need a high credit score, but the second mortgage for the home equity line of credit will most likely require a higher score. For those of you using Credit Karma to track your score, you can learn more about how accurate Credit Karma is.
Is it worth it to obtain a conventional loan from my lender if they do not require PMI?
When avoiding private mortgage insurance, some borrowers may consider obtaining a conventional loan through a private lender, as private lenders sometimes offer loans with low down payments that don’t require private mortgage insurance. However, these loans might also come with significantly higher interest rates, so it may be more cost-effective to get a loan that requires private mortgage insurance. When presented with a conventional loan that doesn’t have private mortgage insurance, always do a comparison between what you will pay in interest, private mortgage insurance, mortgage insurance premium (if obtaining an FHA loan), and the down payment minimum to ensure you’re getting the loan that best meets your financial position.
What Does Private Mortgage Insurance Cost?
Private mortgage insurance is typically contingent on the amount you include in your down payment as well as your credit history. While it will vary, private mortgage insurance tends to cost between 0.5 percent and 1 percent of your mortgage. Private mortgage insurance is recalculated each year and decreases as your loan amount decreases. Some people ask if it's worth it to use their retirement fund or 401k when buying a home and it's not something I would recommend. Leave that money where it is and find another way.
Is it worth it to pay for private mortgage insurance or continue renting until I can afford a bigger down payment?
After obtaining mortgage pre-approval, calculate your mortgage rate and the cost of private mortgage insurance. When doing the private mortgage insurance calculation, it is probably best to assume the maximum amount, at 1 percent, just to be safe. After coming to that calculation, compare that number against rental prices in your area, or against the rental price for the space you’re renting currently. From there, you can consider the following: Will renting give you more time to improve your credit and put money aside for a down payment? Or is it better to pay the private mortgage insurance or mortgage insurance premium and begin putting equity into a home rather than rent?
What are the different types of private mortgage insurance options available for purchase?
There are four main types of mortgage insurance available for borrowers to purchase:
Borrower Paid Mortgage Insurance
Borrower-paid mortgage insurance is the same as private mortgage insurance. It is tacked onto the mortgage payment and can be canceled when the borrower reaches 80 percent equity in the home.
Single-Premium Mortgage Insurance
When the borrower opts for single premium mortgage insurance, that means they are making one large lump-sum payment for the insurance upfront. The downside is that this payment is non-refundable, so if you choose to move a year or two after paying for the single premium mortgage insurance, you will not be able to get that money back. Single premium mortgage insurance is typically combined with the closing costs on a home.
Lender Paid Mortgage Insurance
Lender paid mortgage insurance is when the lender pays for the mortgage insurance. This may come with a higher interest rate, however. Lender paid mortgage insurance cannot be canceled, but the interest rate will go down when you reach 22 percent equity in the home. Buying a home in an environment where interest rates are rising can pose challenges and sometimes opportunities.
Split Premium Mortgage Insurance
Split premium mortgage insurance is when the homeowner pays for part of the private mortgage insurance upfront at the closing and the remaining amount in monthly installments until they reach 80 percent equity in the home. The buyer will get a discount on the private mortgage insurance by going this route.
Key Takeaways on Private Mortgage Insurance
While private mortgage insurance is an unwelcome expense, there are ways of eliminating it or avoiding it altogether. You can always decide after you go under contract on a home whether or not you want to use private mortgage insurance or not. Whatever your financial situation may be, knowing that there are ways around private mortgage insurance will help you maximize the long term return on investment in your home.
Hi there! I'm Ryan Fitzgerald, a REALTOR in Raleigh-Durham, NC and the owner of Raleigh Realty. Chances are you and I share a similar passion, Real Estate! I also have a passion for technology, sports, and people. Would love to hear from you. Drop me a note in the comments section below and feel free to share this article socially!