How to Get Rid of Private Mortgage Insurance (PMI)

How to Get Rid of Private Mortgage Insurance (PMI) article image.

You may be able to get rid of private mortgage insurance (PMI) once you have at least 20% equity in your home based on the house's original value. In some cases, you can get rid of it sooner if you get your home reappraised or refinance your mortgage. There may be an opportunity to do this when home values rise—as they've been doing over the past year.

What Is Private Mortgage Insurance (PMI)?

Private mortgage insurance is an insurance policy you may have to purchase when you get a conventional mortgage from a private lender.

Generally, you have to have PMI if you put less than 20% down. For example, if you buy a $400,000 home, your down payment will need to be at least $80,000 if you want to avoid PMI. Plus, you'll need to budget for closing costs.

Private mortgage insurance protects private mortgage lenders if a borrower doesn't repay a conventional loan. Sometimes, PMI is confused with mortgage insurance that you may have to pay for with other types of mortgages:

  • Mortgage insurance premium (MIP) protects lenders if a borrower doesn't repay their Federal Housing Administration (FHA) mortgages.
  • U.S. Department of Agriculture (USDA) loans require an upfront and monthly premium payment for mortgage insurance.
  • Department of Veterans Affairs (VA) loans don't require mortgage insurance, but you may pay an upfront funding fee to get the loan.

PMI is also different from homeowners insurance, which protects you in case your home or belongings are damaged or stolen. PMI protects the lender.

One important distinction is that you can't remove mortgage insurance on mortgages that are government-backed or -issued unless you refinance to a loan that doesn't require mortgage insurance. You can get rid of PMI, however, or get a mortgage from a private lender without PMI if you have a large down payment.

A PMI policy costs around 0.5% to 2% of the total mortgage. The exact amount can vary depending on your down payment and credit scores. Having good credit can help you qualify for a lower interest rate on your mortgage and lower PMI payments.

Most borrowers pay the monthly PMI premiums as part of their mortgage payment. But you might have the option to pay the entire amount upfront, or split the cost between upfront and monthly payments.

Some lenders also offer PMI-free mortgages to borrowers who put less than 20% down. But these have lender-paid private mortgage insurance (LPMI), and the loans often have a higher interest rate.

How to Get Rid of PMI

Because PMI protects the lender, not the borrower, getting rid of PMI can save you money without taking away any benefits. There are four common ways to remove or cancel your private mortgage insurance.

1. Wait for Automatic Cancellation

The federal Homeowners Protection Act of 1998 (also called the PMI Cancellation Act) requires your loan servicer to automatically cancel your PMI on the date when you're scheduled to have 22% equity in your home. You may also see this written as the scheduled date when the principal balance is 78% of the home's original value.

Additionally, loan servicers must cancel your PMI the month after you're scheduled to be halfway through paying off the loan—15 years into a 30-year mortgage, for instance. The final termination occurs even if you don't have 22% equity. Generally, this happens if you took out an interest-only mortgage, a mortgage with a balloon payment or your mortgage was in forbearance.

In either case, you must be current on your mortgage payments to qualify for automatic PMI cancellation.

2. Request PMI Cancellation

You can also ask your loan servicer to cancel your PMI once the loan's principal value is 80% of the home's original value. The original value is the lesser of the home's appraised value or sale price when you took out the mortgage.

To qualify, you must have a good payment history and can't be behind on your payments. You also might not be able to have a second mortgage—such as a home equity loan or line of credit. Additionally, the lender can require you to get an appraisal and may deny your request if the home's value has decreased since you bought it.

3. Get a New Appraisal

As your home's value rises, the principal balance stays the same and your equity increases. If you've noticed rising prices in your area or have completed home improvement projects, you could have over 20% equity even if you haven't been making extra mortgage payments.

Contact your loan servicer if you think this may be the case. Lenders might be willing to cancel your PMI if you have 20% equity based on the home's current value. However, you may need to pay for a home appraisal first.

4. Refinance Your Mortgage

Another option may be to refinance your mortgage. Whether you'll need PMI on the new loan will depend on your home's current value and the principal balance of the new mortgage. You can likely get rid of PMI if your equity has increased to at least 20% and you don't use a cash-out refinance.

If you prepaid your entire PMI premium, you might be able to get a refund for part of the premiums when you refinance. Borrowers who took out a loan with a higher interest rate and LPMI can also benefit from refinancing with a mortgage that doesn't require PMI.

Check Your Credit and Consider Refinancing

When your creditworthiness improves or interest rates drop, refinancing your mortgage may help you save money. And even if you don't have enough equity to get rid of your PMI, refinancing could lower your interest rate and monthly payment.

Along with your income, current debts and the home's value, your credit history and scores can impact your options. Check your Experian credit report for free, which comes with free credit monitoring that can alert you to unusual activity. You can also check and monitor your FICO® Score 8 based on your Experian credit report, which may help you determine when refinancing makes sense.

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