PMI and Refinancing: Your Guide to Saving

PMI is a form of insurance that protects lenders from financial loss if a borrower defaults on a conventional mortgage. This insurance is typically required when the down payment is less than 20% of the purchase price. While the borrower pays the PMI premium, it safeguards the lender's investment.

When Does PMI End?

PMI is not a permanent expense. Federal regulations mandate that lenders automatically cancel PMI when:

• The loan balance reaches 78% of the original loan amount.
• The borrower reaches the halfway point of the loan term.

However, borrowers can often request PMI removal earlier if:

• The loan balance drops to 80% of the original loan amount.
• The home's value has increased significantly, resulting in at least 20% equity.

Requesting early PMI removal may require a home appraisal to verify the property's value.

PMI isn't the only mortgage insurance option. The Federal Housing Administration (FHA) offers mortgage insurance premiums (MIPs) for those with lower down payments. Unlike PMI, MIPs typically include an upfront premium paid at closing and annual premiums.

For eligible veterans, the Department of Veterans Affairs (VA) offers home loans without requiring PMI or other mortgage insurance.

PMI is crucial to many conventional mortgages, providing lenders with additional security. While it's a cost to consider, understanding its purpose and the conditions for removal can help borrowers make informed decisions about their homeownership journey.

Understanding and Eliminating PMI

Private mortgage insurance (PMI) is an extra expense many homebuyers face when purchasing a property with a conventional mortgage and a down payment of less than 20%.

While PMI primarily protects the lender if the borrower defaults on their loan, it is an added cost that can feel burdensome to homeowners. PMI increases the monthly mortgage payments, making homeownership more expensive.

For most borrowers, the goal is to remove PMI as soon as possible. Fortunately, there are multiple strategies for eliminating this additional cost. This guide will walk you through understanding PMI, how it works, and the various ways to remove it from your mortgage.

What is PMI?

Private mortgage insurance, or PMI, is required by lenders when a borrower makes a down payment of less than 20% of the home's purchase price. This insurance is a safeguard for lenders in case the borrower defaults on the mortgage. The risk is higher for the lender since the loan is more than 80% of the property's value. As a result, the borrower must pay PMI, which is typically added to the monthly mortgage payment.

For example, if you buy a house for $300,000 and put down only 10% ($30,000), your loan will be for $270,000, which is 90% of the home's value. Since your loan-to-value (LTV) ratio is above 80%, you would be required to pay PMI.

PMI can add a substantial amount to your monthly mortgage bill. The cost of PMI usually ranges from 0.3% to 1.5% of the original loan amount annually, depending on factors like your credit score and the size of your down payment. A $270,000 loan could mean paying anywhere from $810 to $4,050 per year or approximately $68 to $338 per month.

Although PMI does not benefit the borrower, it's necessary for many homebuyers, especially those who want to enter the housing market but don't have a 20% down payment saved. Thankfully, once certain conditions are met, PMI can be canceled, reducing your monthly payments and saving you money in the long run.

The Homeowners Protection Act of 1998

The Homeowners Protection Act (HPA) of 1998, also known as the PMI Cancellation Act, was enacted to protect homeowners from paying PMI longer than necessary. This law requires lenders to automatically cancel PMI once the borrower's loan balance reaches 78% of the original home value, meaning the LTV ratio is 78%.

For example, if you bought a home for $300,000, your lender must automatically cancel PMI when your outstanding mortgage balance drops to $234,000, assuming you are current on your payments. This applies to loans originated after July 29, 1999.



In addition to automatic cancellation, the HPA allows borrowers to request PMI cancellation once their loan balance reaches 80% of the home's original value. The law provides homeowners with a critical safety net, ensuring they do not pay PMI longer than necessary. However, homeowners need to proactively understand their rights and responsibilities to eliminate PMI as soon as possible.

How to Get Rid of PMI

The key to eliminating PMI is reaching at least 20% equity in your home, meaning your loan balance is no more than 80% of your home's original or current value. Here are several ways to achieve that and eliminate PMI:

1. Wait for Automatic Termination
   The simplest way to get rid of PMI is to wait until your lender automatically cancels it. This occurs when your loan balance reaches 78% of the original purchase price. Your lender must terminate PMI without your action as long as you are current on your payments. This method is the most passive approach, but it requires time, as you must wait until your regular payments gradually reduce the loan balance to the required level.
   
   It may take several years for a 30-year fixed mortgage before reaching the 78% LTV threshold, especially if you made a small down payment. However, this option is guaranteed as long as you stay current with your mortgage, making it a reliable way to eliminate PMI eventually.
   
   
2. Request Early Cancellation
   You don't have to wait for your lender to cancel PMI automatically. Once your loan balance reaches 80% of the original home value, you can proactively request PMI cancellation. This means you'll need to have at least 20% equity in the home.
   
   To initiate the process, write a formal request to your lender for PMI cancellation. Most lenders will require that you be up-to-date on your mortgage payments and may also request proof, such as a new home appraisal, to ensure your home's current value still meets the 80% LTV requirement.
   
   This method allows you to cancel PMI sooner than automatically, potentially saving you months or years of PMI payments. However, it does require acting and possibly spending money on a new appraisal.
   
   
3. Pay Down Your Mortgage Faster
   If you want to eliminate PMI sooner, you can make additional payments toward your mortgage principal. Paying extra on your loan will reduce the balance quicker, helping you reach the 80% LTV threshold ahead of schedule.
   
   Even small additional payments, made consistently, can accelerate your progress toward canceling PMI. For example, adding an extra $100 to your monthly mortgage payment can reduce the total loan balance and cut years off your mortgage term, allowing you to eliminate PMI much faster.
   
   This strategy is advantageous if you have extra income, bonuses, or tax refunds that you can use to make larger or more frequent payments. Paying down your mortgage faster also saves you interest over the life of the loan, providing a double benefit.
   
   
4. Refinance Your Mortgage
   Another option to eliminate PMI is to refinance your mortgage. Refinancing can be particularly attractive if interest rates have dropped since you took out your original loan.
   
   When you refinance, your lender will require a new appraisal to determine the current value of your home. If this appraisal shows that you have at least 20% equity in your home, you can refinance into a new loan that doesn't require PMI.
   
   However, refinancing comes with costs, such as closing fees, so it's important to calculate whether the savings from eliminating PMI and lowering your interest rate will outweigh these expenses. If you plan to stay in the home for several years, refinancing may be a smart move to get rid of PMI and save on interest payments.
   
   
5. Reappraise Your Home
   If property values in your area have risen significantly since you purchased your home, you may be able to eliminate PMI by requesting a new home appraisal. If the new appraisal shows that your home's value has increased enough to give you 20% equity, you can ask your lender to cancel PMI.
   
   This strategy works best in a strong housing market with steadily rising property values. However, weighing the cost of a new appraisal, which typically ranges from $300 to $500, is essential against the potential savings from eliminating PMI.
   
   Remember that not all lenders will accept a new appraisal as grounds for PMI cancellation. Check with your lender to understand their specific requirements before pursuing this option.
   
   
6. Improve Your Home
   Improvements to your home, such as remodeling the kitchen, adding a bathroom, or upgrading the landscaping, can increase its market value. If the value rises enough, it could help you reach the 20% equity threshold to cancel PMI.
   
   However, home improvements can be costly, and there's no guarantee that they will increase your home's value enough to eliminate PMI. Before embarking on a renovation project to cancel PMI, consider the costs involved and consult with a real estate agent or appraiser to estimate how much value the improvements will add.

Remember Your Rights Under the Homeowners Protection Act

The Homeowners Protection Act (HPA) gives homeowners necessary rights regarding PMI cancellation. By law, you are entitled to have PMI removed once you meet specific conditions. Suppose your lender does not follow through with automatic termination or makes it difficult to cancel PMI when you are eligible. In that case, you can file a complaint with the Consumer Financial Protection Bureau (CFPB).

Staying informed about your rights and understanding how PMI works can help avoid overpaying your mortgage. Whether you wait for automatic cancellation, request early removal, or use one of the other strategies mentioned above, eliminating PMI can save you hundreds or even thousands of dollars over the life of your loan.

Key Takeaways

While PMI is an additional cost many homebuyers must bear, it doesn't have to be permanent. By understanding how PMI works and exploring the various methods for eliminating it, you can take control of your mortgage and reduce your monthly payments. From paying down your mortgage faster to refinancing or improving your home, several strategies exist to achieve the 20% equity needed to cancel PMI. Taking proactive steps and understanding your rights under the Homeowners Protection Act can eliminate PMI and make homeownership more affordable.