How Much Does It Cost to Get Rid of PMI?

Private Mortgage Insurance (PMI) is a common feature of conventional mortgage loans, particularly for homeowners who make a down payment of less than 20% of the home’s purchase price. This insurance serves to protect the lender from financial loss if a borrower defaults on their loan. For many homeowners, removing PMI represents a significant opportunity to reduce their monthly housing expenses, making it a desirable financial goal.

Understanding Your Current PMI Cost

Private Mortgage Insurance (PMI) is a cost to the homeowner that protects the mortgage lender. Lenders typically require PMI when the loan-to-value (LTV) ratio exceeds 80%, meaning the down payment was less than 20% of the home’s purchase price.

PMI premiums are generally calculated as a percentage of the total loan amount, influenced by factors such as the LTV ratio, the loan type, the borrower’s credit score, and the overall loan amount. Annual PMI costs can range, on average, from 0.22% to 2.25% of the mortgage balance. Homeowners can typically locate their current PMI payment amount listed under the “Explanation of amount due” or “insurance” section of their monthly mortgage statement, often included within their escrow payment.

Methods for Removing PMI

Several pathways exist for homeowners to eliminate Private Mortgage Insurance, each with specific conditions for eligibility. One common method is automatic termination, largely governed by the Homeowners Protection Act (HPA) of 1998 for loans originated after July 29, 1999. Under this act, PMI must be automatically cancelled by the lender when the loan’s principal balance is scheduled to reach 78% of the property’s original value, provided the borrower is current on their mortgage payments. This termination is based on the initial amortization schedule, requiring no direct action from the homeowner.

Homeowners can also pursue borrower-initiated cancellation, often seeking removal earlier than the automatic termination date. This typically occurs when the loan balance reaches 80% of the original value of the home. To initiate this, borrowers usually need to submit a written request to their mortgage servicer. Lenders may require evidence that the property’s value has not declined and that no subordinate liens exist on the property.

Another approach to removing PMI involves refinancing the existing mortgage. By obtaining a new loan with a loan-to-value ratio of 80% or less, homeowners can eliminate PMI. This method can be particularly advantageous if the home’s market value has increased significantly since the original purchase, allowing the homeowner to achieve the necessary equity threshold.

Accelerating principal payments is a proactive strategy that can help homeowners reach the required LTV thresholds sooner for both automatic and borrower-initiated cancellation. Making extra payments directly reduces the loan’s principal balance, thereby increasing the homeowner’s equity more quickly than scheduled payments alone. This expedited equity building allows the homeowner to meet the 80% or 78% LTV requirements ahead of the original amortization schedule.

Costs Involved in PMI Removal

While removing PMI can lead to long-term savings, certain methods involve upfront financial outlays. For borrower-initiated cancellation that relies on current property value, a home appraisal is frequently required to confirm the updated valuation. The cost for a home appraisal can typically range from $300 to $1,000.

Refinancing, though effective for PMI removal, incurs various closing costs similar to those paid when the original mortgage was obtained. These costs typically range from 2% to 6% of the new loan amount. Common fees include loan origination fees, which are generally 0.5% to 1% of the loan amount, covering the lender’s processing and underwriting expenses. Other expenses in a refinance can include title services, such as a new lender’s title insurance policy, which might cost around 0.5% of the new loan amount.

Additional refinancing costs may encompass credit report fees, typically ranging from $10 to $100 per borrower, and underwriting fees, which can fall between $300 and $900. These administrative charges contribute to the overall cost of securing a new mortgage.

Automatic PMI termination, as mandated by the Homeowners Protection Act, generally incurs no direct out-of-pocket costs for the homeowner. Similarly, if a borrower-initiated cancellation does not necessitate a new appraisal, the associated costs are minimal, often limited to small administrative fees.