Private mortgage insurance, or PMI, is what you pay to insurance the mortgage loan on your home.
If you’ve been paying your mortgage insurance premium for years and you want to find out how to get rid of PMI.
Were going to show you some of the strategies you can use to remove PMI and lower your monthly mortgage payment.
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What is PMI?
PMI stands for private mortgage insurance which is an insurance policy on your mortgage loan. PMI will reimburse the mortgage lender if the borrower ever defaults on a mortgage. This helps reduce the risk of loss allowing mortgage lenders to offer home loans.
PMI is required on all mortgages with a loan-to-value ratio (LTV ratio) above 80%. LTV is another way to calculate the amount of equity you have in your home. If you have a LTV ratio of 7-%, this means of you have a 30% equity stake on your mortgage.
FHA loans require mortgage insurance for the life of the loan if you put less than 10% down. FHA has a slightly different term for mortgage insurance. It’s referred to as a mortgage insurance premium (MIP) and it’s required for 13 years if you put at least 10% down on an FHA mortgage.
How to get rid of PMI
To remove PMI on your home loan you’ll need to have an LTV ratio below 78%. If you have an FHA loan you may need to refinance into a conventional loan to get rid of PMI.
- Keep up with monthly payments while also having a good payment history
- Make sure the balance of your loan is 78 percent or less of the current value of your home
- You cannot have a second mortgage on the property
- Have a decent FICO score
Of all three of the above prerequisites, the second one may be the most significant. This one, most of all, helps you determine whether or not you can get a PMI in the first place. The value of your house can change over the years.
You may have bought it at $100,000 five years ago but, now, its value increased to $150,000. This means a decrease in the loan-to-value ratio, the new LTV ratio may be under 78 percent. In order to find out the current market value of your home lenders will order a new home appraisal.
How to calculate your LTV ratio
In this case, the percentage refers to how much is left of your loan to how much your home costs right now. Next, take your loan balance and divide it by the value of your house. When you’ve calculated your percentage, you can determine the next actions to take. If the percentage is below 80 percent, then you could immediately begin the procedures to canceling your PMI.
If your percentage is above 80 percent, then figure out when you will reach 80 percent. This is so that you can save how much you need. You may already save to pay for the PMI each year, but having a clear goal helps you determine how much money you should put away. Also, if the value of your house is unchanging or increasing each year, then that makes it easier to balance your budget.
Let’s use a home with a value of $200,000 as an example:
If the loan balance is $156,000 then the amount owed on the home is 78% of the value of the house. In this scenario you would be able to refinance your loan and avoid PMI.
Ways to Get Rid of PMI
There are multiple different scenarios where you can apply to remove mortgage insurance:
- Refinancing out of an FHA loan
- Obtain a new appraisal
- Remodel your home to increase the market value
- Pay down the LTV ratio below 78%
- Make an extra mortgage payment towards your principle balance
To refinance your mortgage means getting a whole new loan. You are doing this to replace your current one. With home prices on the rise over the last several years there is a good chance your home has increased in value. If it has, and your estimated LTV ratio is 78% or less, you can remove PMI by refinancing your home.
If you currently have an FHA mortgage you will need to refinance out of an FHA loan into a conventional loan.
When you refinance your house and the LTV is 78% or less then you will avoid PMI on the loan, this can save hundreds of dollars each month. In order to refinance, however, you need to get a new home appraisal.
Your current home appraisal, the market value of your property, may be outdated. You can request a new appraisal not only for refinancing but to also keep track of your PMI. New appraisals can cost somewhere between $300 and $500.
Before getting that home appraisal, however, you can try remodeling your home. This will help increase the value of your house. While you are at it, try fixing up some problematic areas with the architecture. There may be some cracks in the wall, plumbing issues, or even a small pest problem you can get rid of.
Try paying a little extra towards your principal balance each month. Chipping away smaller chunks once a month can be much easier than chipping away larger chunks once a year. It also means that getting closer to your PMI goal can be less stressful and more routine.
Who Can’t Get Rid of PMI
It’s possible that your lender has marked you as a high-risk borrower. A high-risk borrower is someone who doesn’t pay off parts of the loan on time or at all. The property owned by the borrower then gets marked as a high-risk property.
If you no longer wish to have this title, make sure all of your payments are on time. After that is when you can ask your lender for a PMI removal.
FHA PMI Removal
If you have an FHA loan and put less than 10% down when you closed on the mortgage, the Federal Housing Administration requires you pay PMI for the life of the loan. You can get rid of PMI on an FHA loan if your LTV is 78% or less by refinancing into a conventional loan.
If you have an FHA loan and the LTV of your loan is below 78% you should consider refinancing out of your FHA loan into a conventional loan to drop PMI.
Mortgage insurance will drop off automatically when the LTV reaches 78% on a mortgage, unless you are required to pay PMI for the life of the loan.
Depending on the cost of your PMI, you may not have to wait too long for it to be canceled. Your lender is required to remove your PMI once a couple of factors apply:
- when the PMI reaches its midpoint lifespan, and
- if there is 78 percent or less left of the PMI to pay
Both of these must apply at the same time. In addition to the value of your house, remember how long your PMI lasts. This will help you set the necessary goals if you want your PMI to be canceled naturally. Understand, though, that some PMIs may last around 30 years. If you want to remove it sooner, then you may have to resort to the methods previously mentioned.
How to Avoid PMI in the First Place
- Pay a 20% downpayment
- 80-10-10 piggyback loan
- VA Loans do not have PMI
- Lender-Paid Mortgage Insurance
Whether you are a first-time house buyer or just want to move from your current one, it’s highly recommended that you try to avoid PMI. One way to do this is by paying for 20 percent of the house’s value up front. PMI, then, will not apply. If you happen to be in the military, then you could also apply for a VA loan. Once again, you will not have to pay for PMI.
There’s also the option of Lender-Paid Mortgage Insurance (LPMI). Here, the lender pays off your PMI for you. The trade-off is that they will also raise your mortgage rate by, usually, about 0.75 percent. Be sure to talk to your lender about this, first.
There’s also the choice of a “piggyback loan.” This is where you can use a loan to pay off 20 percent of the house’s cost. There may not be a loan that will allow you to borrow that particular amount, however. You may have to pay off 10 percent, and then obtain a loan that will pay off the other 10 percent. Another tactic you can use is taking two mortgages. If this is the case, then people will usually take one mortgage that pays 80 percent and another that pays 10 percent. The last 10 percent will be paid out of pocket.
USDA loans are another type of mortgage option available from the Government. This rural housing loan has a much lower mortgage insurance premium than FHA home loans at just 0.35% of the loan amount.
Avoiding or cancellation of mortgage insurance may essentially require you to jump through some hoops. You may have to wait a couple of years before you can request to remove your PMI. Even then, there are requirements to follow.
Avoiding a MIP could be done easily if you could pay at least 20 percent of the house’s cost right away. That’s not usually the case, however.
You may still need other loans to help you out. No matter what you do, though, these obstacles are worth avoiding or removing your PMI.
What is PMI?
PMI stands for private mortgage insurance. PMI is insurance on the loan in the event a borrower defaults on the loan the lender is protected.
How much is PMI?
PMI costs will vary depending on the type of loan you have.
- FHA Loan with less than 10% down: PMI = 0.85%
- FHA Loan with more than 10% down : PMI = 0.80%
- Conventional Loans: PMI = between 0.50% – 1.0%
How to get rid of PMI?
You can get rid of PMI when a mortgage is 78% or less than the value of the property. Unless, you have an FHA loan and put less than a 10% down payment you will pay PMI for the life of the loan.
How to avoid PMI?
To avoid PMI, the following options are available:
- Pay 20% downpayment
- 80 10 10 piggyback loan
- VA Loans do not have PMI
- Lender-Paid Mortgage Insurance
When does mortgage insurance drop off?
Your mortgage insurance will drop off when your LTV reaches 78% or less.
Randall has over 15 years of experience in the mortgage and credit industries. He spends a chunk of time helping consumers understand their credit, advise them on how to increase their credit, and lending his mortgage expertise to help them find the right type of loan. Randall lives in Dallas, Texas with his two sons.