How to get rid of PMI

Saving for a substantial down payment can feel like an insurmountable challenge for aspiring homeowners. There are mortgage options that provide flexible paths to homeownership, allowing buyers to purchase a home with as little as 3% down through conventional loans. This lower initial investment may come with a trade-off: private mortgage insurance (PMI).

PMI might seem like an unwelcome additional expense when finances are already tight, but it can also be a strategic tool that enables buyers to purchase homes sooner. In this guide, we'll discuss PMI and explore strategies for removing it, helping you optimize your mortgage and save money over time.

What is PMI?

Private mortgage insurance is a type of insurance policy that protects your lender from the possibility that you default on your loan. If you do default, the insurance reimburses your investor for some of its losses.

It’s an additional cost added to your monthly loan payment and typically applies if you get a conventional mortgage with less than 20% down.

PMI can be helpful for borrowers because it makes it easier to qualify for a loan with a smaller down payment.

PMI vs. other types of insurance

When you buy a home, there are many different types of insurance you may run into. Some have very similar names, and it can be difficult to understand exactly what each type of insurance covers. This chart breaks it down.

Different types of PMI

Private mortgage insurance can come in a few different forms, each of which works slightly differently. Each protects your lender, but the premiums can be paid in different ways or by different parties.

Borrower-paid mortgage insurance (BPMI)

Borrower-paid mortgage insurance is paid through a monthly fee added to your mortgage payment as part of your escrow account. This same account is how many clients opt to fund their property taxes and homeowners' insurance.

Lender-paid mortgage insurance (LPMI)

Lender-paid mortgage insurance is an option where the lender pays your mortgage insurance premiums. In exchange, your lender will usually give you a higher interest rate than they would if you paid it as a monthly fee or didn’t have PMI.

Split-premium PMI

Split-premium PMI involves making part of your mortgage insurance payment up front at closing. Doing so lowers the amount charged monthly for mortgage insurance.

Single-premium PMI

Single-premium PMI is paid in a lump sum at closing, but there is no ongoing monthly cost. This gives you the advantage of keeping the lowest rate possible while avoiding a monthly fee for mortgage insurance. However, it does mean you need more cash upfront and may not be worth it if you’d eliminate PMI quickly or sell the home soon after buying it.

The borrower can pay this, but they can also receive the assistance of sellers or homebuilders.

How much does PMI cost?

The cost of PMI varies based on many factors, including the amount of your loan, the size of your down payment, and your credit score. The bigger your down payment and the better your credit score, the less you’ll typically pay because that helps reduce the lender’s risk.

You can usually expect to pay between $30 and $70 per month for every $100,000 you borrow. That means that with a $400,000 mortgage, PMI would cost between $120 and $350 a month.

What does PMI cover?

PMI coverage pays your lender to help them recover some of their losses if you default on your loan. While not directly benefiting borrowers, PMI does give lenders the ability to issue mortgages based on down payments of less than 20%.

PMI vs. FHA MIP vs. funding fees

PMI only applies to conventional loans. If you apply for an FHA loan, you’ll have to pay Mortgage Insurance Premiums (MIP) instead. PMI and MIP work quite similarly, but MIP includes an upfront fee in addition to a monthly payment.

Other loan programs, such as VA loans or USDA loans, don’t charge for mortgage insurance but do have a funding fee you need to pay up front.

Rocket Mortgage offers conventional, FHA, and VA loans but does not offer USDA loans.

When does PMI go away?

The general rule is that you can request that PMI come off your loan once you reach 20% equity. Know that this applies to BPMI. LPMI doesn’t come off, and you would have to refinance¹ or the opportunity at a lower rate. Under federal law, this is to be requested in writing. Otherwise, it automatically comes off once you reach 22% equity.

Clients whose loans are serviced by Rocket Mortgage® are able to view their outstanding balance in relation to their estimated home value within their Rocket Account. The value will have to be verified, but you can divide your remaining loan balance by the home value and multiply by 100. If it’s less than 80%, it may be a good idea to contact your servicer about your options to remove PMI.

Besides the payments themselves, you can request removal based on either an increase in market value or home improvements pushing up your home value. If you’ve made home improvements, you can request PMI removal as long as you have 20% equity. If you’re basing your request on an increase in market value without making any improvements, you need to have 25% equity. After 5 years, 20% equity suffices.

You can usually make extra payments toward your principal balance to meet the requirements to remove PMI faster. You can check with your lender to see if this is allowed on your loan.

Steps to get rid of mortgage insurance

Mortgage insurance is an additional monthly payment you need to make, and it doesn’t benefit you by adding to your home equity. It makes sense to try to get rid of it as soon as you can.

Use these steps to remove PMI from your loan:

• Build equity in your home by adding improvements to increase its value or paying down your debt
• Once you reach 20% equity, contact your loan servicer by chat, phone, or in writing to request that PMI be removed
• Your loan servicer will typically send someone to provide a valuation and determine if you now have sufficient equity to remove PMI.
• Check your loan statements to confirm if PMI has been removed

If you have lender-paid mortgage insurance, the cost of the coverage is rolled into your loan’s interest rate. That means the only way to remove it is by refinancing. With FHA loans, you can only remove MIP by waiting it out or refinancing. However, before refinancing, make sure you’ll truly save money after paying closing costs.

PMI on multifamily and investment properties

If you buy an investment property or multifamily home, you may still need to pay for PMI or MIP. The requirements for removing insurance payments differ slightly based on which government-sponsored mortgage enterprise bought your loan.

If your mortgage is owned by Fannie Mae, the mortgage insurance automatically cancels halfway through the loan term for multiunit properties or rentals. If you’re requesting removal based on the original value of the home, you need at least 30% equity. While you can’t request mortgage insurance removal before 2 years other than based on the original value, this 30% figure also applies after 2 years if your value has increased for any reason.

If your investment property or multiunit home loan is owned by Freddie Mac, there’s no automatic cancellation of mortgage insurance. You must request it if you want PMI removed.

Regardless of the reason you request termination, you need to show 35% equity. There’s no waiting period if this is based on the original value or home improvements. If you’re basing this solely on increases in market value, you need to wait at least 2 years.

The bottom line: Understanding PMI can save you money

Although PMI protects lenders if you default on your loan, it provides the advantage that you won't have to make a 20% down payment. If you do the right things, it can often be removed.

If you're interested in seeing what you can qualify for with Rocket Mortgage, you can apply online.

¹ Refinancing may increase finance charges over the life of the loan.