How To Get Rid Of PMI

You likely had to add private mortgage insurance (PMI) to your conventional loan if you bought a home with less than 20% down. PMI can add hundreds of dollars to your monthly payment – but you don’t need it forever. You can often request PMI removal once you own 20% equity in your home. And lenders generally must drop PMI automatically when your loan-to-value ratio (LTV) hits 78%.

In this article, we’ll go over the basics of PMI and what it covers, and we’ll also show you how and when you can stop paying it.

What Is PMI?

Before we take a closer look at how to get rid of PMI, it may be helpful to have some extra context on PMI.

PMI is a type of insurance some conventional loan borrowers must pay. If you have PMI, you pay it as part of your monthly mortgage payment. It offers the owners of your mortgage some protection in the event of a default or foreclosure.

Mortgage lenders may require PMI payments if your down payment on your house is less than 20%. Providing a higher home loan amount, with less money down from the buyer, can be a higher risk for lenders and mortgage investors. PMI alleviates that risk and can make qualifying for a mortgage more feasible, even without a large down payment.

PMI Vs. Other Types Of Insurance

PMI is often confused with two other types of insurance that a lender may require or recommend:

• Homeowners insurance: Homeowners insurance protects you against damage to your property. All mortgages require you to have some form of homeowners insurance as a condition of your loan.
• Mortgage protection insurance: Mortgage protection insurance (MPI) is a type of optional coverage that pays off your mortgage if you pass away before you own your home. MPI is sometimes referred to as mortgage life insurance.

What Mortgage Insurance Do You Need For Conventional Loans?

The two types of PMI for conventional loans are borrower-paid mortgage insurance (BPMI) and lender-paid mortgage insurance (LPMI).

Borrower-Paid Mortgage Insurance (BPMI)

BPMI is the most common and simple type of PMI. Your lender adds a PMI fee to your monthly payment, which you must pay until you reach 20% equity in your home. In other words, you must pay your loan balance down to 80% of your home’s original value. Once you reach this threshold, you can request cancellation.

Lender-Paid Mortgage Insurance (LPMI)

LPMI allows you to avoid adding a fee to your monthly payment. Instead, you accept a slightly higher interest rate than you could get without LPMI. Unlike BPMI, you can’t cancel LPMI. LPMI sticks around for the life of the loan, and you’ll continue to pay the same interest rate after you reach 20% equity. The only way to get rid of LPMI is to reach 20% equity and refinance the loan.

With LPMI, you may have the option to pay all or some of your PMI costs upfront at closing. You could get a lower interest rate if you make a partial payment toward your mortgage insurance. If you pay all your LPMI costs at closing, your mortgage rate may be closer to the one you’d get without LPMI.

FHA Loan Mortgage Insurance Requirements

LPMI and BPMI only apply to conventional mortgages. What about FHA loans? An FHA loan is a government-backed mortgage that’s insured by the Federal Housing Administration (FHA). You pay a mortgage insurance premium (MIP) instead of PMI for an FHA loan. MIP is similar to private mortgage insurance and gives your lender the same protections if you default on your loan. However, you must pay for MIP at closing and each month. You must also pay MIP for the life of your loan if you have less than 10% down. If you put 10% down, you pay MIP for 11 years.

How Much Does PMI Cost?

The amount you’ll pay for PMI depends on a wide range of factors, including:

• Your down payment: Your lender will charge some kind of PMI if your down payment is lower than 20%. The lower your down payment, the higher risk you are to lenders. You can decrease your PMI expenses by bringing a larger down payment to closing.
• Your credit score: This number indicates to lenders how responsible you are when you borrow money. Do you always make your payments on time? Your credit score will be higher. Do you frequently miss payments or max out your credit? Your score will be lower. A lower score indicates that you may be more likely to default on your loan. As a result, you’ll pay more in PMI.
• Your loan type: You’ll pay less for PMI if you have a fixed-rate loan. This is because fixed-rate loans are more predictable for lenders compared to adjustable-rate mortgages.

Your property type, debt-to-income ratio (DTI) and home value may also influence how much you pay for PMI. As a general rule, you can expect to pay 0.1% – 2% of your total loan amount per year in PMI.

What Does PMI Cover?

PMI helps the owner of your mortgage avoid financial loss if you default on your loan. Fortunately for homeowners, you don’t have to pay for PMI forever – or even for the duration of your mortgage loan.

When Does PMI Go Away?

As stated, you must pay BPMI until you have 20% equity in your property. Equity refers to the percentage of your principal or mortgage balance you’ve paid off. For example, let’s say you borrow $100,000 to buy a home and you pay off $30,000 of principal. This means you have 30% equity in your home.

Keep in mind, only payments toward your principal balance count toward your equity. Paying interest doesn’t help you build equity. Contact your lender and request a mortgage statement if you don’t know how much equity you have. Rocket Mortgage^® makes this information available to you online.

You can contact your lender to request they cancel your BPMI once you build 20% equity in your home. This happens automatically once your LTV ratio hits 78%, which means you have 22% equity.

On the other hand, LPMI is required no matter how much equity you have in your home; you have to pay it for the duration of your loan. The only way to cancel LPMI is to refinance your mortgage. If you refinance your current loan’s interest rate or refinance into a different loan type, you may be able to get rid of your LPMI.

How To Speed Up The Process

You may want to make extra payments on your loan if you want to stop paying for PMI as soon as possible. Your extra payments can go directly toward reducing your principal balance. But you have to tell your lender specifically that’s where you’d like it credited. Lenders could automatically apply extra money toward next month’s payment instead.

Additionally, if you’re planning on making extra payments to get rid of PMI sooner, be sure to talk to your lender. Some types of loans don’t let you make payments ahead of time for the purpose of mortgage insurance removal.

How To Get Rid Of PMI

You can remove PMI from your monthly payment once you have 20% equity in your home. You can do this either by requesting its cancellation or refinancing the loan. The specific steps you’ll take to cancel your PMI will vary depending on the type of insurance you have.

Borrower-Paid Mortgage Insurance

When you reach 20% equity in your home, you can make a request to your lender to remove your BPMI. That process looks like this:

Step 1: Build 20% Equity

You can’t cancel your PMI until you have at least 20% equity in your property. Continue to make payments on your loan each month. Divert any extra money you have coming in toward your principal to build equity faster.

Be sure to include a note with your extra payments to tell your lender you want the payment to go toward your principal balance and not your next payment. Sometimes there’s a spot on your statement or a checkbox online for this.

Step 2: Contact Your Lender

As soon as you have 20% equity in your home, let your lender know to cancel your PMI. Follow any necessary steps your lender requires to make this happen.

Step 3: Make Sure Your PMI Is Gone

Ask your lender to confirm that you no longer have to pay PMI. Then, request a mortgage statement with your current payment information. Make sure your monthly payment is lower than what you paid with PMI on your loan. Request more information from your lender if your monthly payment stays the same.

Lender-Paid Mortgage Insurance And Mortgage Insurance Premiums

You can only remove your payments with a refinance if you have LPMI or you have MIP and made less than a 10% down payment. (However, some borrowers may qualify for FHA MIP removal if their loan started before June 3, 2013.) Here’s how that process works:

Step 1: Reach 20% Home Equity

You must reach 20% equity in your home before you’re allowed to refinance. You’ll need to pay for PMI again if you refinance with less than 20% equity.

Step 2: Compare Lenders

You don’t have to refinance with your current lender – you may work with a new company if you’d like. Compare lenders in your area and choose one you’d like to use for a mortgage refinance. Check their refinancing standards to make sure you qualify before you apply.

Step 3: Apply For A Refinance

Fill out an application, submit your financial documentation and respond to any inquiries from the lender as soon as possible. Remember to specify you want to refinance to a conventional loan.

Step 4: Wait For Underwriting And Appraisals To Clear

Once you apply for your loan, your lender will begin a process called underwriting. During this time, a financial expert looks at your documents to make sure you qualify for a refinance. Your lender will also help you schedule a home appraisal. Then, you must wait for the appraisal and underwriting processes to be completed.

Step 5: Acknowledge Your Closing Disclosure

After underwriting and an appraisal, your lender will send you a document called a Closing Disclosure. This document tells you your new loan terms as well as what you must pay in closing costs. Remember to acknowledge it as soon as you receive it. Your lender can’t schedule your closing until you have time to read your disclosure.

Step 6: Attend Closing

Here you’ll pay your closing costs and sign on your new loan. From there, you make payments to your new lender.

FAQs About PMI Removal

If you still have questions about getting your PMI removed, the following FAQs may provide some clarification.

When does PMI go away?

When your loan balance, or LTV ratio, reaches 78% of the home’s original purchase price, your lender must automatically terminate your PMI. You can also request PMI cancellation when you have 20% equity in your home.

How can I avoid PMI?

To avoid paying PMI on your mortgage, you’ll need to have 20% of the home’s sales price to use as a down payment on a conventional loan. You could also take out a piggyback loan, if it’s available from your lender. In this case, you’d make a 10% down payment on your home and use a second mortgage to get to 20% equity. However, this method can have drawbacks, so be sure to carefully consider whether it's your best option.

Rocket Mortgage doesn’t allow second mortgages to cover part of your down payment.

Can PMI be removed if my home’s value increases?

You can typically remove PMI if market conditions lead to a significant increase in your home’s value. You have to make a request with your lender and order a new appraisal. The appraisal confirms your property value rose enough to where you own the required amount of equity.

The Bottom Line: Getting Rid Of PMI Can Save You Money

PMI is a type of insurance that protects your mortgage owners and investors if you default on your loan. But the only protection it gives you as the buyer is the freedom to make a smaller down payment. As you build equity in your home, you may be able to cancel your PMI so you can save money each month.

If you have a conventional loan and own 20% equity in your home, contact your lender to see if they can cancel your mortgage insurance. If your mortgage has lender-paid mortgage insurance, you need to refinance your loan to ditch your insurance payments for good.

If you’ve hit 20% equity and need to refinance, you can apply today with Rocket Mortgage and say goodbye to your PMI.