When we were in the process of building our dream home, we pretty well expected to go over budget. Knowing this, we tried to cut expenses as much as we could. The one expense that we knew that we absolutely had to avoid was PMI (Private Mortgage Insurance). Recently, I had a reader question also pertaining to PMI: Joe A. wants to know:
I’ve had my mortgage for 2 years and want to get rid of my PMI. The lender told me that I must get a home appraisal to prove that I have at least 80% equity. Well, I got the appraisal and then paid the loan down to 80% of my home’s value. But then the lender sent me a letter saying I need a loan-to-value that’s 75%!
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Now I’m worried that I’ll pay the loan down to 75%, but they’ll just have another excuse not to remove my PMI. What should I do?
Before I tell you the best ways to get rid of PMI, let’s take a step back and make sure you know what it is.
What Is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance or PMI is a product that protects a lender in case you default on a home loan and they’re forced to foreclose. It’s a downright irritating expense because it’s like having to pay for your neighbor’s health insurance each month—it doesn’t benefit you in the least.
Paying PMI allows you to get a mortgage when you can’t come up with 20% down, but it’s also an added monthly expense. That’s why Joe and many homeowners are itching to get rid of monthly PMI payments so they can keep more money for themselves.
How Much Does Private Mortgage Insurance (PMI) Cost?
The cost of PMI varies based on various factors, like the amount and term of a mortgage. But it could be in the neighborhood of 0.5% up to 1.5% of the mortgage amount per year. For example, if you have a $150,000 mortgage, your PMI premium could cost about $65 per month.
You can check your annual mortgage escrow account statement or contact your lender to find out how much you’re paying for PMI.
5 Ways to Get Rid of Private Mortgage Insurance (PMI)
There are 5 ways to avoid or to get rid of PMI:
- Make a 20% Down Payment: The best way to make sure you never have to pay PMI is to avoid it altogether by paying a minimum of 20% down on your home. That means you may have to delay a home purchase while you continue saving up.
- Automatic Cancellation Based on Your Home’s Original Purchase Price: For a conventional mortgage that you took out on or after July 29, 1999, your PMI must be canceled automatically once you have 22% equity in your home. Once you’ve paid your mortgage balance down to 78% of the original value of your property, federal law requires a lender to cancel your PMI. However, this rule only applies if your mortgage payments have been current for a full year, or they’re no more than 60 days late within the past 2 years, and you have no liens on the property. Additionally, the lender can require evidence that the value of your home hasn’t dipped below its original value. They may also require that you don’t have a second mortgage or a home equity line of credit. For a mortgage you signed before July 29, 1999, it’s up to you to contact your lender and request that they remove PMI once you reach 20% equity. Different states may have laws that affect PMI cancellation for older mortgages, so contact your lender for more information.
- Request Cancellation Based on Your Home’s Original Purchase Price: If you pay down your mortgage balance to 80% or less of the original price—or the appraised value at the time of the sale, whichever is less—you can request that your lender remove PMI. This request doesn’t force a lender to remove it but is subject to regulations under federal and state law. Again, they can require evidence that the value of your home isn’t lower than its original value.
- Request Cancellation Based on Your Home’s Current Value: If you pay down your mortgage to 75% or less of your home’s current value (as determined by a licensed residential appraiser), you can request that your lender remove PMI.
- Midpoint Termination: PMI must be canceled when your mortgage reaches the midpoint of the term. For instance, for a 30-year loan with 360 monthly payments, the midpoint is after you make the 180th payment. This cancellation only applies if your mortgage payments are current.
So, getting back to Joe’s question, I’m guessing that the lender first gave him instructions based on number 3 above. They wanted to find out if Joe had a loan-to-value of at least 80% of the original value of his home. Since the real estate market has declined over the past several years, it’s likely that Joe’s home value has dipped since he bought it 2 years ago.
That’s probably why the lender gave him new instructions based on number 4 above, requiring that his loan balance be 75% of his current home value.
| Method | Description |
|---|---|
| 1. 20% Down Payment | Avoid PMI with a 20% Down Payment. |
| 2. Automatic Cancellation | PMI Automatically Removed at 22% Equity or 78% Mortgage Balance, Subject to Conditions. |
| 3. Request (Original Value) | Request PMI Removal at 80% of the Original Purchase Price, Following Federal and State Regulations. |
| 4. Request (Current Value) | Request PMI Removal at 75% of Current Home Value Determined by an Appraiser. |
| 5. Midpoint Termination | PMI Canceled at Mortgage’s Halfway Point if Payments Are Current. |
You Have Rights Under the Homeowners Protection Act
As a homeowner, Joe is covered by the PMI provisions in the federal Homeowners Protection Act of 1998. If he does pay the loan down to 75% and his lender doesn’t follow the rules for canceling his PMI, Joe can file a complaint with the Federal Trade Commission (FTC) at ftc.gov.
The Bottom Line – 5 Ways to Get a Mortgage Without Private Mortgage Insurance (PMI)
Navigating the complexities of PMI can be a daunting task for homeowners. Private Mortgage Insurance is a safeguard for lenders, but for homeowners, it can be an unwanted monthly expenditure. Fortunately, there are multiple methods to eliminate or avoid PMI, from the straightforward approach of a 20% down payment to automatic cancellation or request-based routes that take into account the property’s original or current value.
Joe’s experience underscores the need for homeowners to be well-informed, especially in fluctuating real estate markets. Equipped with knowledge and supported by the Homeowners Protection Act, homeowners can confidently work towards freeing themselves from PMI expenses.
I have a FHA loan. Is it best to refinance to a conventional loan or wait the 5+ years and have the PMI eliminated when I reach the 80% mark.
Another way around PMI is to put down 5 or 10% on the house. Take out a home equity line at the time of closing for the remaining to get you up to 20%, that would be 15 or 10%. Then you get your standard mortgage for the remainder.
Back before the bubble burst this was becoming common practice, immediately after the bubble burst they did away with this practice pretty much entirely. Since then I have heard of this starting to work again. I am sure you will have to search lenders a bit more to find one that might be willing to do this and there is a chance that this practice might not work at all in your market, but it is worth a shot.