How Can You Get Rid of PMI on Your Mortgage?

Private Mortgage Insurance (PMI) is a common feature for many homeowners, especially those who secured a conventional mortgage with a down payment less than 20% of the home’s purchase price. This insurance protects the lender in the event a borrower defaults on the loan, rather than providing any direct benefit to the homeowner. While PMI allows individuals to purchase a home sooner without a substantial down payment, it adds to the monthly mortgage payment. This article explores the primary methods homeowners can utilize to remove PMI from their mortgage.

Automatic PMI Termination

The Homeowners Protection Act mandates that lenders automatically terminate PMI for certain conventional loans. This automatic termination occurs once the principal balance of the mortgage is scheduled to reach 78% of the home’s original value. This calculation relies on the initial amortization schedule for the loan, assuming consistent, on-time payments.

Beyond the 78% loan-to-value (LTV) threshold, the Act also stipulates that PMI must be automatically terminated when the loan reaches the midpoint of its amortization schedule. For instance, on a 30-year mortgage, the midpoint would be after 15 years, regardless of the loan’s outstanding balance at that time. For either automatic termination to occur, the borrower must be current on their mortgage payments. If the loan is not current on the scheduled termination date, PMI will be terminated once the payments are brought up to date.

Borrower-Requested PMI Cancellation

Homeowners can proactively request the cancellation of PMI once their mortgage balance reaches 80% of the home’s original value. This “original value” is typically defined as the lesser of the sales price or the appraised value at the time the loan was originated. Making additional principal payments can help a homeowner reach this 80% LTV threshold faster than the original amortization schedule.

Lenders usually require a good payment history for a borrower-requested cancellation, often meaning no payments 30 days late in the past 12 months and no payments 60 days late in the past 24 months. Additionally, the homeowner may need to certify that there are no junior liens, such as a second mortgage or home equity line of credit, on the property. If a homeowner believes their property has appreciated significantly, they might request an appraisal to confirm the current market value, which can help reach the 80% LTV based on the new, higher value. The homeowner is typically responsible for the appraisal cost.

To initiate the cancellation process, the homeowner must submit a written request to their mortgage servicer. The servicer may then request documentation or require an appraisal to verify the property’s value and the loan-to-value ratio. The servicer will then review the information and notify the borrower of their decision.

Refinancing to Eliminate PMI

Refinancing the mortgage presents another strategic avenue for eliminating PMI. When a homeowner refinances, the original loan, along with its associated PMI, is paid off and replaced with a new mortgage. If the new loan’s principal balance is 80% or less of the home’s current appraised value, the new mortgage typically will not require PMI.

This approach is particularly beneficial if the home’s value has increased significantly since the original purchase, or if the homeowner has made substantial principal payments. However, refinancing involves new closing costs, which can range from 2% to 5% of the new loan amount, encompassing fees for appraisals, credit checks, and title services. It is important to weigh these upfront costs against the potential monthly savings from eliminating PMI and any changes to the interest rate.

Homeowners should also consider the current interest rate environment, as securing a lower rate can amplify the financial benefits of refinancing. Refinancing also means starting a new loan term, which could extend the overall repayment period, even if monthly payments decrease.