How to get rid of Private Mortgage Insurance (PMI)
Private Mortgage insurance (PMI) is required by mortgage lenders when a homebuyer/borrower makes a down payment of less than 20% of the property’s purchase price. PMI payments are incorporated into the homeowner/borrower’s monthly mortgage payment. PMI protects the mortgage lender should the homeowner fail to make their mortgage payments.
Many homeowners ask, when does PMI go away? Getting rid of PMI is a straightforward process, as long as you're making your monthly payments and have enough equity.
Getting rid of PMI or asking your lender for PMI cancellation is the right of the borrower. There are several ways to achieve PMI insurance removal, which we’ll discuss here in more detail.
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Read on to learn more about how to get rid of PMI.
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What is private mortgage insurance (PMI)?
Mortgage insurance protects the mortgage lender from financial loss if the homeowner (borrower) fails to repay the loan. In these cases, the insurance provide would pay the lender for their loss. Mortgage insurance is also important to home buyers, as it lets people who make low or no down payment qualify for a mortgage. Learn more about
what is mortgage insurance.
How does PMI work?
Not everyone can afford to put 20% down on a home purchase to avoid PMI from the start. For example, on the purchase of a $500,000 home, the buyer would need to make a 20% down payment of $100,000. That’s a lot of cash and most people just don’t have that much available. Many homebuyers will be able to qualify for a mortgage using a lower down payment, as long as they pay PMI to cover the lender’s risk.
If you are required to pay mortgage insurance, your lender will “roll” the amount into your monthly mortgage payment. Once 20% equity in the home is reached, you can request mortgage insurance removal.
PMI is unique to conventional loans, which are mortgage loans that are not government-insured. Government-insured mortgage loans (FHA, VA, and USDA), have a different form of mortgage insurance:
- FHA loans. Homebuyers who get a mortgage loan insured by FHA, must pay an up-front mortgage insurance premium (MIP), which can be included in the loan amount. You will also have to pay a monthly insurance premium that is added to the regular mortgage payment. FHA uses the premiums to pay the lender if the borrower defaults on their mortgage. Find out more about the difference between PMI and MIP.
- VA loans. The U.S Department of Veterans Affairs backs VA loans. The funding fee is a one-time payment that the veteran, service member, or survivor pays on a VA-backed or VA direct home loan. This fee helps to lower the cost of the loan for U.S. taxpayers since the VA home loan program doesn’t require down payments or monthly mortgage insurance. The VA funding fee may be waived for veterans who meet certain requirements.
- United States Department of Agriculture (USDA) loans. These loans have no mortgage insurance. USDA guaranteed loans are charged an annual guarantee fee instead of mortgage insurance. Guarantee fees are paid to USDA by the lender and are usually included in the homeowner's monthly loan payment. Whether you’re ready to apply for a mortgage or still shopping around, a CU SoCal Mortgage Loan Originator can provide you with loan options and a mortgage insurance cost estimate, so you can decide which mortgage loan is right for your unique situation.
Types of PMI
There are three types of mortgage insurance:
- Borrower-paid mortgage insurance (BPMI). This is a type of PMI, which is paid monthly by the borrower as part of their mortgage payment, until they have enough equity in the property, at which point the lender may cancel or waive the PMI payments.
- Lender-paid mortgage insurance (LPMI). The term “lender-paid” is a misnomer that homebuyers should be aware of. With LPMI, the borrower still pays the insurance. The only difference between this option and PMI is that with LPMI, the lender adjusts the mortgage interest rate the borrower pays to cover the mortgage insurance cost. If you choose this form of mortgage insurance, you’ll pay it with a higher interest rate and it will be in effect for the duration of the mortgage, with no opportunity to have it waived or canceled. However, homebuyers who plan to stay in the home for a short period of time may save money using this option. The best long-term option is PMI.
- Mortgage title insurance. According to Consumerfinance.gov, lender’s title insurance protects your lender against problems with the title to your property, such as someone with a legal claim against the home. Lender’s title insurance only protects the lender against problems with the title. To protect yourself, you may want to purchase owner’s title insurance.
How much is PMI?
In general, the mortgage insurance cost is about 0.5 to 2% of the loan amount per year. How much can you expect to pay? If your loan amount is $300,000 and your mortgage insurance is 1.0% annually, you’d pay $3,000 for mortgage insurance in a year, and $250 per month.
Options for removing PMI
As mentioned earlier, PMI protects the lender. All lenders charge PMI on conventional loans when there’s less than 20% down payment. When does PMI go away? Once a conventional mortgage loan has PMI there are several ways it can be removed.
If you have been paying off a mortgage for several years and have been paying mortgage insurance, you may contact your lender and ask that it be waived. The lender will calculate whether you have 20% equity. Waiving PMI is just another way to say PMI cancellation and mortgage insurance removal.
These are the four options for getting rid of PMI:
Request PMI removal when mortgage balance reaches 80%. It is possible to get PMI removed as you build equity in your home. Growing equity comes from making mortgage payments, which reduce the total amount of the money owed.
Pay down your mortgage for automatic termination. You can make extra payments to reduce the principal loan balance. By doing so you will build equity faster than if you only pay the recurring monthly payment.
Refinancing. If you can get an interest rate that’s lower than your current rate,
refinancing can help you save in two ways: pay less interest on the mortgage and eliminate PMI if your new loan amount is less than 80% of the home’s value. Learn more about when to
refinance your mortgage.
Reappraisal. If your home has appreciated in value, as most homes have these days, consider getting a new appraisal to show the new market value. You may find that you have 20% equity based on an increased value plus the amount of the mortgage you’ve already paid off.
According to the
Consumer Financial Protection Bureau, if you are current on payments, your lender or servicer must end the PMI the month after you reach the midpoint of your loan’s amortization schedule. (This final termination applies even if you have not reached 78% of the original value of your home.) The midpoint of your loan’s amortization schedule is halfway through the full term of your loan. For 30-year loans, the midpoint would be after 15 years have passed.
How to avoid PMI:
The most common ways to avoid paying PMI are:
- Make a larger down payment. Your mortgage lender can help you run the numbers to determine how much you need to put down in order to avoid PMI.
- Piggyback loan. This is sometimes referred to as a “second mortgage.” The Consumer Financial Protection Bureau explains that, when using a “piggyback” mortgage, lenders structure the loans differently. For example, the same borrower might pay for the home with: a 10 percent down payment, 80 percent main mortgage, and a 10 % “piggyback” second mortgage. In this scenario, the borrower is still borrowing 90% of the value of the home, but the main mortgage is only 80%. The “piggyback” second mortgage typically carries a higher interest rate, which is also often adjustable.
Knowing your rights
The
Homeowners Protection Act (HPA) of 1998 became effective in July 1999. The act, also known as the PMI Cancellation Act, establishes provisions for the cancellation and termination of PMI, sets forth disclosure and notification requirements, and requires the return of unearned premiums.
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