How To Get Rid Of PMI

You probably 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 to pay for it forever.

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.

Before we take a closer look at how to get rid of PMI, it may be helpful to gain some extra context on what PMI is. Your lender requires PMI payments when you buy a home with a mortgage and bring less than 20% for a down payment. But what exactly is PMI and what protection does it afford you?

PMI is a type of insurance that borrowers must pay on their conventional loans. It offers your lender some protection in the event that you default on your loan or go into foreclosure. You pay PMI as part of your monthly mortgage payment. Without charging for PMI, some lenders may not be willing to provide mortgages to home buyers with a small down payment due to the risk they take on when lending, so paying PMI is helpful to homeowners in that it can make getting a mortgage more feasible.

PMI is often confused with two other types of insurance required or strongly recommended by your lender:

• Homeowners insurance: Homeowners insurance protects you against damage to your property. Most lenders require that you have some form of homeowners insurance as a condition of your loan.
• Mortgage protection insurance: Mortgage protection insurance is a type of optional coverage that pays off your mortgage in the event that you die before you own your home. This is also sometimes referred to as mortgage life insurance.

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

Borrower-Paid Mortgage Insurance (BPMI)

BPMI is the most straightforward and simple type of PMI. Your lender adds a PMI fee to your monthly payment with BPMI. You must continue to pay these BPMI fees until you reach 20% equity in your home. Once this threshold is reached, 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 PMI. It’s important to remember that, unlike BPMI, you cannot cancel LPMI. LPMI sticks around for the life of the loan, and you’ll need to continue paying the same interest rate after you reach 20% equity.

The 20% figure applies if you get there based on the payments that you make. If you make a request based on the equity from home improvements leading to an increase in market value, the standards can be slightly different depending on how long you’ve been paying PMI. Speak with your lender. The only way to get rid of LPMI is to reach 20% equity and then refinance your loan.

Choosing LPMI means you may have the option to pay all or some of your PMI costs at closing. You’ll get a lower interest rate if you make a partial payment toward your mortgage insurance. If you pay for the entirety of your LPMI costs at closing, you’ll get an interest rate that’s identical to the one you’d get if you didn’t have to pay for LPMI.

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.

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.

PMI helps your lender 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.

You must pay BPMI until you have 20% equity in your property. Equity refers to the percentage of your principal or mortgage balance that 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 that payments that only go 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. Many lenders also make this information available to you online.

You can contact your lender and request that they cancel your BPMI once you’ve built 20% equity in your home. Many lenders will automatically do this once you reach 22% equity.

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 money can go directly to reduce your principal balance when you make an extra payment, but you have to tell your lender specifically that’s where you’d like it credited. Many lenders will automatically apply extra money toward next month’s payment instead.

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

Lender-paid mortgage insurance is required no matter how much equity you have built up in your home. That means you’ll have to pay your private mortgage insurance for the duration of your loan. The only way to cancel PMI 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 cancel your mortgage insurance.

You can remove PMI from your monthly payment after your home reaches 20% in equity, 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 that your BPMI be removed. That process looks like this:

Step 1: Build 20% Equity

You cannot 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. Don’t forget to include a note with your extra payments that tells 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 that your monthly payment is lower than what you were paying when you had PMI on your loan. Request more information from your lender if you see that your monthly payment stays the same.

Lender-Paid Mortgage Insurance And Mortgage Insurance Premiums

You can only remove your payments through a refinance if you have LPMI or you have MIP and made less than a 10% down payment (though, 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’ll be 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 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 that 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 and makes sure you qualify for a refinance. Your lender will also help you schedule an appraisal. 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 the terms of your new loan as well as what you must pay in closing costs. Remember to acknowledge it as soon as you receive it. Your lender cannot 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.

If you still have questions about getting your PMI removed, the following FAQs could help to provide some additional clarification.

When does PMI go away?

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

How can you 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. You could also take out a piggyback loan, in which case you’d make a 10% down payment on your home and use a second mortgage to get to 20% equity. However, there are several drawbacks to this method, so be sure to carefully consider whether it's the best option for you before doing so. Rocket Mortgage® does not allow second mortgages to cover part of your down payment at this time.

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

Your PMI can typically be removed from your mortgage if market conditions have led to a significant increase in your home’s value. For this to happen, you’ll have to make a request with your lender and order an appraisal to confirm that your property value has risen enough to where you have the required amount of equity. 

PMI is a type of insurance that protects your lender if you default on your loan – but it gives you no protection as the buyer other than the freedom to make a smaller down payment. As you build up equity in your home, you may be able to cancel your private mortgage insurance so you can save money each month.

If you have a conventional loan and have built up 20% equity in your home, contact your lender and see if they can cancel your mortgage insurance as soon as possible. If you have an FHA loan or have a mortgage with lender-paid mortgage insurance, you’ll need to refinance your loan to ditch those insurance payments for good.

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