If you have the default kind of PMI (private mortgage insurance), you pay for it each month when you make your mortgage payment. So it makes your monthly payment higher than it otherwise could be. The good news is, you don’t have to keep it forever. This article will tell you how to get rid of PMI on your home.
First, What is PMI?
Lenders usually require private mortgage insurance if you put less than 20% down on your home. They are taking on more risk, so they want to be protected. But it’s not like other types of insurance.
That’s because this kind of borrower-paid PMI covers the lender if you can’t make your mortgage payments, not you. But you pay for it each month as part of your monthly payment.
Why remove PMI? In short, it can cost you a lot of money, so that’s a good reason to remove PMI early if you can.
(That money could be going to help you pay off your mortgage faster, for example.)
There are rules in place that can help you get it done.
The Homeowners Protection Act
Some of the ways to dump PMI are spelled out in the Homeowners Protection Act of 1998. The HPA is a federal law that’s also known as the PMI Cancellation Act.
The law went into effect on July 29, 1999. Before that, there weren’t many protections for those who wanted to cancel PMI on the home they live in.
The act covers owners of single family homes where the house is their main residence. (Note that condos, townhouses, co-ops, and mobile homes are also considered single family homes for the purpose of the act.)
It does not apply to FHA or VA loans. (FHA mortgage insurance premiums or MIP isn’t the same as PMI, although it serves a similar purpose.)
How to Get Rid of PMI
According to the act, there are 3 main ways to get rid of PMI. You can do so via:
- Borrower request
- Automatic termination
- Final termination
Finally, you may be able to refinance to remove PMI, so that’s a fourth way to do it. If you have a high risk or non-conforming loan, you’ll only be able to use the last two methods.
Let’s talk about each of the above methods in turn.
1. Borrower Request for PMI Cancellation
This is just what it sounds like. You write to your mortgage company and ask them to remove PMI. They’ll have to do it as long as you meet certain requirements.
To qualify, you must:
- have a good payment history
- be current on your mortgage
- meet one of the loan-to-value (LTV) ratio requirements
If your mortgage paperwork requires it, you may also have to prove that the property value has not gone down and certify that it doesn’t have any subordinate liens.
The Loan-to-Value Ratio Requirements
There are two ways to go about meeting this so that you can ask for early cancellation. The requirement can be based on the original value (the value of the house when you bought it) or the current value (what it’s worth now.) This can be complex, so there is a flowchart that can help after the explanations.
If you go with the original value, you need a loan-to-value ratio of 80% or less. Put another way, the amount you owe on your loan has to be 80% or less of either your purchase price OR what the house appraised for when you bought it. (Whichever is less.)
To figure that out, look up how much you paid for the house and how much it appraised for in your loan paperwork. Then ask your mortgage company how much you owe on it now and do a little math to figure out the LTV. (More on how to do that later.)
If you go with the current value, you’ll need a new appraisal, which can cost you a few hundred dollars. But don’t rush out and get one yet. Talk to your lender first to make sure they don’t have any other steps to follow. Check the values of comps in your area as well. (A real estate agent can help you get comps.)
The LTV you need for current value depends on when you got the loan: If you got the loan:
- Less than 2 years ago, you may be able to get rid of PMI if your loan-to-value is 75% or less. But the increased value has to be due to improvements you made.
- 2-5 years ago, PMI may be deleted if the LTV is 75% or less based on the appraisal.
- 5 or more years ago, then the LTV just has to be 80% or less based on the appraisal.
Those last two bullet points are what can help you cancel PMI if your home value increases.
Here’s that same info in the form of a flowchart:
How to Find Your Loan-to-Value Ratio
You need to know the balance on your loan and the value of your home. Depending on which method you use, the value of the home can be either its current value or the value of it when you bought it.
Once you know that, the loan-to-value ratio is figured like this:
loan balance ÷ value = loan to value
For example, suppose you paid $200,000 for your house, and you owe $160,000 on it now. You would plug those numbers into the formula:
loan balance ÷ value = loan to value
$160,000 (what you owe) ÷ $200,000 (what you paid) = .8
Since .8 is another way of saying 80%, you could ask the lender in writing to cancel PMI based on original value.
Here’s another example. Suppose you owe $183,260 on your house now, and you bought it 4 years ago. It appraises for $238,000 today.
The formula of $183,260 (what you owe) ÷ $238,000 (the current appraisal value) = .77 or 77%.
In that case, you wouldn’t qualify yet because you bought the house 4 years ago and the ratio is more than 75%.
2. Automatic Termination Method
As the name implies, you don’t need to do anything special to get rid of PMI using this method.
With it, PMI will end when the mortgage balance is set to reach 78% of the original home value. (As long as you are current on your mortgage.) You can tell when this will be by looking at the amortization schedule or asking your loan servicer.
If you’re not current and you reach this point, it’ll end on the first day of the first month after you do become current.
3. Final Termination Method
This 3rd way of ending PMI comes in to play if the first two haven’t already happened. In that case, the loan servicer has to cancel PMI once you’ve reached the halfway point in the mortgage period.
This is most likely to happen if you have an interest only loan, or a big balloon payment due late in the loan.
Again, for the final termination method to work you have to be current on the loan. If you’re not current and you’ve reached this point, it’ll end on the first day of the first month after you do become current.
4. Refinancing to Get Rid of PMI
This final method has you getting rid of PMI as a side effect of refinancing.
Unless you’re lucky enough to do a true no-cost refinance (which are rare) refinancing only as a way to get rid of PMI may not be worth it. That’s because there are fees and closing costs involved. So you’ll have to check if you would come out ahead or not.
But refinancing to a lower interest rate can be a way to save money, especially if you’re also able to switch to a shorter term. (Like a 15 or 20 year loan.)
And if your new loan doesn’t require PMI (because it’s for less than 80% of the home’s value) that’s one more way to save. It will get rid of PMI on your old loan because you’ll no longer have the loan.
What If You Have Trouble Removing PMI?
The first 3 methods are set out by law. So if you qualify for one of those but are having trouble removing PMI, see if you can speak to a supervisor at your loan servicer.
Do keep in mind that you have to request it in writing.
If going further up the chain doesn’t work, contact the Consumer Financial Protection Bureau (CFPB). You can fill out their complaint form here. They can help you exercise your rights regarding PMI.