Mortgage insurance is a monthly pain in the budget. But it can make buying your first home possible. Here’s how it works.Full article
How to get rid of your private mortgage insurance (aka PMI)
October 26, 2017
Let's just say it: it’s hard not to resent PMI (private mortgage insurance). It protects your lender, not you, yet you’re the one who has to pay for it every month. Argh. And besides, after putting so much time, money, and heart into buying and maintaining a home, the last thing you'll want to do is default on your mortgage.
But the thing is, most of us don’t have a big enough down payment to avoid PMI — or MIP, the version attached to some government-backed loans, such as FHA loans.
So the real question is, will PMI ever go away? Yes! Once you have enough equity built up in your home, you can get rid of mortgage insurance one way or another and put that money back where it belongs: in your wallet.
Here’s the scoop on the various ways to do it.
Cancel your PMI when you reach 20 percent equity
First, a quick review: PMI, or private mortgage insurance, protects the lender if you can't repay your loan. It usually applies to conventional loans when your down payment is less than 20 percent. For details on how PMI works, read our in-depth post.
Now, with 20 percent as the threshold for the PMI requirement in the first place, it only makes sense that once you’ve built up 20 percent equity in your home, you don’t have to pay it anymore. And that’s the case. From the bank's perspective, you can cancel PMI when the amount you have left to pay on your loan falls to 80 percent of the original value of your home. (A few lenders have easier standards.)
Notice that we said the “original value” of your home. That means either the price you bought it for or the appraised value at the time, whichever is lower. If you managed to get a deal, the price you paid might be lower than the appraised value. (If you refinance, the “original value” will turn into the appraised value at the time of refinancing.)
When will you reach 20 percent equity? The “projected payments” section of the closing disclosure form that comes with your mortgage paperwork shows how many years you’ll be paying PMI. If you received an amortization schedule — a detailed payoff schedule — with your loan paperwork, it may include a loan-to-value (LTV) column that will allow you to pinpoint the date. (Don’t have your amortization schedule? Ask your servicer about getting it.) The schedule shows how each mortgage payment you make is chipping away at the loan’s percentage of your home’s value. When the percentage drops to 80, you can cancel the PMI.
How do you cancel? Simply submit a written request to your servicer. Contact them first, because you do have to meet a few conditions, and some of the specifics can vary from servicer to servicer. Here are the most common requirements:
- You must have a good payment history
- You must be current on your payments
- You might have to certify that there’s no lien on the property
- You might have to hire an appraiser to prove that the value of the property hasn’t fallen below the original value, thus lowering your equity
PMI ends automatically at 22 percent equity
Obviously, it’s best to be proactive and get that PMI out of your life as soon as you achieve 20 percent equity. But if you miss the boat on that, your servicer is required by law to automatically cancel the PMI once your loan-to-value reaches 78 percent, i.e. your equity reaches 22 percent. The same conditions above apply.
In rare cases, PMI ends automatically when you reach the midpoint of the loan’s amortization schedule, even if you haven’t reached 78 percent of your home’s original value. So if you have a 30-year mortgage, after 15 years.
Can PMI be paid off early?
Yes! Make extra payments on principal. We’re big on making extra payments on principal, above and beyond your regular monthly payment. You build equity faster, pay off your loan earlier, potentially save tens of thousands of dollars on interest, and get rid of the extra expense of PMI sooner. The bottom line can be seriously motivating. Check out the math here.
Remember that even one extra payment on principal changes your original amortization/payoff schedule, so the date it shows you reaching a loan-to-value of 80 percent will no longer be accurate. For a reasonably accurate update anytime, divide the “outstanding principal” shown on your most recent mortgage statement by what you paid for your home. That gives you the current loan-to-value (based on payments alone). When it hits 80 percent, you’re probably eligible to cancel your PMI. For example:
Increase the value of your home. If you make significant improvements to your home, you might increase the value enough to reach 20 percent equity sooner. You’ll have to pay for an appraisal to prove the increased value, but unless you’re already close to 20 percent, it’s very likely to be worth it.
Pray for a rising market. A rising market can boost the value of your home enough to get your equity to 20 percent early. Again, you’ll have to pay for an appraisal to prove the increased value.
To get rid of MIP, plan to refinance
If you have a government-backed loan, you probably have MIP, or mortgage insurance premium. It’s the version of mortgage insurance that’s required for some government-backed, low-down-payment loans, such as FHA loans. For details on how MIP works, read our in-depth post.
Unlike PMI, MIP is usually required for the life of the loan. That’s the trade-off for the low down payment and lower base interest rate. The only way to get rid of it is to someday refinance into a conventional mortgage, which can definitely be worth doing. PennyMac has good info on the pros and cons of making the switch from an FHA loan to a conventional one.
Exception: If you in fact put down 10 percent or more, MIP will drop away after 11 years.
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