How To Get Rid Of PMI

While it’s not a bad idea to save as much as you can for a down payment, other goals and the urgency of the situation mean this isn’t feasible for many buyers. But if you’re getting a conventional loan, you can get into a home with as little as 3% down. You just have to pay private mortgage insurance (PMI). But no one likes to pay extra fees longer than they have to, so we’ll go over when and how to get rid of it.

The requirements for removing PMI can vary when dealing with a multiunit or investment property. We’ll talk briefly about how that works in a special section later on, but understand that the majority of this article will deal with PMI on single-unit and vacation homes.

What Is PMI?

Private mortgage insurance, or PMI, provides a payment for part of the outstanding loan amount if a borrower defaults on their loan. While lenders get some peace of mind for taking on additional risk, it also benefits those looking to buy or refinance a home because they can get mortgages with down payments or existing equity lower than 20%. But you can also typically request its removal once you reach 20% equity.

PMI Vs. Other Types Of Insurance

It could be easy to mix up PMI with one of these other types of insurance:

• Mortgage insurance premiums (MIP): MIP serves the same function as PMI and there’s even the same three letters in the acronym, so it’s almost set up for confusion. But where PMI applies to conventional loans, MIP is charged on FHA loans. We’ll have more on this later.
• Homeowners insurance: Among other potential benefits depending on your coverage, homeowners insurance is intended to provide funds after property damage. At a minimum, lenders require you to carry high enough limits to repair or rebuild your home to its current condition.
• Mortgage protection insurance: Mortgage protection insurance (MPI), or mortgage life insurance, is optional coverage to pay off your home loan if you pass prior to the loan being paid off.

Different Types of PMI

PMI has the same function for all conventional loans. The differences come in how the premiums are paid.

Borrower-Paid Mortgage Insurance (BPMI)

Paid by the borrower, BPMI 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)

LPMI is an option where the lender pays your mortgage insurance premiums. In exchange, your lender will usually give you a higher 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 upfront 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. This gives you the advantage of keeping the lowest rate possible and also avoiding a monthly fee for mortgage insurance. The borrower can pay this but they can also receive the assistance of sellers or homebuilders.

How Much Does PMI Cost?

Although there are exceptions, PMI generally costs in the range of 0.1% – 2% of your loan amount per year. That’s a wide range, so here are two main factors involved in determining your premiums:

• Down payment: Your down payment not only impacts whether you have PMI, but how much you can expect your premiums to be. The higher your down payment, the lower your PMI.
• Credit score: Your credit score is another risk factor that impacts both your loan qualification and how much you pay for mortgage insurance. The higher your score, the less you can expect to pay.

Other risk factors accounted for include your debt-to-income ratio, the property type and how the home is occupied.

What Does PMI Cover?

PMI coverage pays your lender if you default on your loan to help them recover some of their losses. 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: What’s The Difference?

PMI isn’t the only type of mortgage insurance. There are also mortgage insurance premiums (MIP), associated with FHA loans. These come with an upfront premium paid at closing or built into the loan amount.

There are also annual premiums paid on a monthly basis, ranging from 0.15% – 0.75% of the loan amount depending on factors such as your loan term, loan amount and your down payment or amount of equity. For FHA Streamline loans with the previous loan closed on or prior to May 31, 2009, the upfront MIP is 0.01% of the loan amount and the annual MIP is 0.55%.

Another key difference is that for loans closed after June 3, 2013, MIP only comes off after 11 years if you’ve made a down payment or have existing equity of 10% or more. For loans made prior to that date, MIP falls off when you reach 22% equity based on the original value of the home. If your term is more than 15 years, the rule is the same, but you must have paid premiums for at least 5 years.

VA and USDA loans don’t have mortgage insurance, but they come with funding or guarantee fees. Rocket Mortgage^® doesn’t offer USDA loans, but we’ve included the guarantee fee requirements here for your research purposes.

VA loans have a funding fee of 1.25% – 3.3% depending on your down payment or equity amount and whether it’s your first time using a VA loan. If you have an Interest Rate Reduction Refinance Loan (IRRRL or VA Streamline) or you’re assuming a loan, the funding fee is 0.5% of the loan amount. Disabled veterans, qualified surviving spouses and those who have returned to active duty after receiving a Purple Heart are exempt.

USDA loans have an upfront guarantee fee of 1% of the loan amount. There’s also an annual fee of 0.35% of the average annual unpaid principal balance that can be split into monthly payments. The upfront portion can be added to your mortgage balance

When Does PMI Go Away?

The general rule is that you can request 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 refinance for 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.¹ 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 either request removal based on 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.

How To Speed Up The Process

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.

How To Get Rid Of PMI

To get rid of PMI, you’ll have to contact your servicer. The law requires a written request, but they may have a specific form you can fill out.

Borrower-Paid Mortgage Insurance

1. Build up equity in your home. The goal is at least 20%.
2. Contact your servicer. You can even do this in the months leading up to hitting the magic number. That way you know what to expect.
3. Make the request. Legally, it has to be in writing. Your servicer will be able to give you instructions.
4. Get a home valuation. Your servicer will send someone out to make sure the home value hasn’t fallen and meets expectations. This may be an appraisal or some alternative.
5. Make sure PMI has come off. Compare statements to make sure you’re no longer being charged for mortgage insurance.

Lender-Paid Mortgage Insurance And Mortgage Insurance Premiums

You can only remove LPMI by refinancing. It’s the same story if you’re looking to remove FHA MIP without a 10% down payment on FHA loans made after June 3, 2013. Whether this makes sense for you depends on the rate and payment you have compared to what you can find on the current market. You’ll also want to factor in closing costs.

PMI On Multifamily And Investment Properties

So far throughout this article, we’ve discussed PMI on single-unit homes that are primary residences or vacation properties. If you’re looking for a multiunit property up to four units or any investment property, the requirements are slightly different. The rules vary depending on who purchased your loan. There are lookup services for Fannie Mae and Freddie Mac.

Starting with 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 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 you value has increased for any reason.

If you’re investment property or multiunit home loan is owned by Freddie Mac, there’s no automatic cancellation of mortgage insurance. 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 put down 20% for a down payment. If you do the right things, it can often be removed.

If you're interested in checking out your loan options, you can apply online.

¹ Rocket Account is your account created in connection with Rocket Mortgage, Rocket Loans or Rocket Homes Real Estate LLC. Rocket Mortgage, Rocket Loans and Rocket Homes Real Estate LLC are separate operating subsidiaries of Rocket Companies, Inc. Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation and applicable legal and regulatory requirements.