How to Get Rid of Private Mortgage Insurance (PMI)

PMI is a form of insurance that is designed to protect a lender in the event you default on your mortgage. However, you are responsible for paying PMI monthly premiums, which is why this expense is included in your mortgage payment.   

When a lender loans you money to buy a home, it incurs a certain level of risk. The amount of risk depends on several factors, such as your credit score, your repayment history, and the total amount you are borrowing. Another major factor that lenders use to assess risk is the percentage of the home purchase that you are financing.  

Let’s say that you want to purchase a $300,000 home and are able to pay closing costs and put $60,000 down. In this scenario, you would finance the remaining $240,000, which is 80% of the home’s value.  

The lender is not taking on excessive risk in this scenario. Suppose that the worst happens, and you can no longer make payments. If the bank forecloses on the loan, it will still be able to recoup its money lent to you — even if the home’s value drops below $300,000 based on the “equity position” from the 20% down payment. 

However, say that you are only able to put down $30,000, or 10% of the home’s value. In this case, you would finance 90% of the home. Under these circumstances, the lender would be taking on a bit more risk. If you default on the loan, it will be harder for the lender to recoup all of the money lent to you. 

That’s where private mortgage insurance (PMI) comes into play. PMI is required if you finance more than 80% of the home’s appraised value. If you put 20% or more down on your home purchase, you do not need PMI. 

Now that you understand how PMI works, here are four ways to remove PMI: 

• Making payments until PMI automatically cancels  
• Asking for removal when equity is 20% or higher 
• Make a large principal reduction to reduce your loan balance to 80% and ask for removal 
• Getting a new appraisal if your house has increased in value 

Remember, these strategies only work with conventional loans and might not be applicable to other loan types. 

Yes, PMI requirements differ by loan type. Here is a breakdown of PMI by loan type and how to remove it:

Many factors influence your total PMI payment, including your debt-to-income ratio, your credit score, the home’s total value, and how much money you are putting down. While you will have to pay private mortgage insurance whether you put 3% down or 18% down, the closer you are to that 20% mark, the lower your PMI will be. 

Your annual PMI costs will range from 0.1% to 2% of the total loan amount. For instance, if you borrow $270,000, your payments could be as high as $5,400 annually, or roughly $450 per month. Or they could be as low as $270 annually — a little over $20 per month. 

Keep in mind that PMI payments are rarely at the extreme ends of this range. In the above example, you can expect to pay between $150 and $300 per month. If you are already working with a lender, the lender should be able to provide a more accurate PMI estimate. 

It depends. If you have an FHA loan, then you will have to refinance to get rid of mortgage insurance. Otherwise, these payments will remain a part of the loan permanently. 

If you have a conventional loan, you can wait until your mortgage balance reaches 78% of the original value of your home. When assessing whether to remove PMI, lenders generally use the original value of your home at the time of purchase.   

Additionally, some lenders will remove PMI if you can show that your home has risen in value and that you now have at least 20% equity. In that case, you might pay for a professional appraisal to prove your home’s new value to your lender. 

Refinancing can also allow you to drop PMI sooner. If you refinance your home, the lender will conduct a new appraisal and use this value to determine whether PMI is required. Your home value has probably increased significantly since you originally purchased it, especially if you bought your house before the recent market spike or if you have made a large principal reduction. This means you might be able to drop PMI earlier, as long as the appraisal indicates that you have at least 20% equity in your home.