There are many costs to homeownership. For homebuyers who put down less than 20% on a conventional mortgage, private mortgage insurance (PMI) is often an extra cost that’s required by the lender. However, there are several ways to remove PMI and save on monthly mortgage payments.
The first step is to make sure you understand exactly what PMI is and how it works, whether you’re already paying PMI or thinking about taking out a loan that would require it. Then you can learn some strategies for how to get rid of mortgage insurance.
Table of Contents
Key Points
• PMI is an extra fee on conventional mortgages for homebuyers who put down less than 20%.
• PMI can be automatically terminated when your Loan-to-Value (LTV) ratio drops to 78% of the home’s original value, or when you reach the midpoint of your loan’s amortization schedule.
• You can request early PMI cancellation when your LTV ratio reaches 80% (20% home equity), provided you have a good payment history.
• Strategies to get rid of PMI faster include refinancing, getting a home reappraisal, or paying extra toward your mortgage principal.
• FHA loans use an MIP (mortgage insurance premium) instead of PMI, and VA and USDA loans do not require mortgage insurance but may have other fees.
What Is PMI?
PMI is an additional fee charged by lenders on conventional mortgages if the down payment is less than 20% of the purchase price. Because conventional mortgages are not backed by the government, PMI is meant to protect lenders if borrowers can’t afford mortgage payments and default on the loan. Note that this protection does not extend to the borrower.
Generally, you pay for PMI as a monthly premium that’s tacked on the mortgage payment each month. Alternatively, you may have the option to make a one-time payment on PMI at closing. In either case, the cost of PMI is included in the loan estimate and closing disclosure provided by the lender.
PMI can also apply to mortgage refinancing on a conventional loan if the borrower’s equity is less than 20% of the property value.
PMI vs MIP
When purchasing a property, there are different types of home mortgages to choose from. The type of home loan will impact whether PMI or MIP (mortgage insurance premium) is included in your mortgage payment.
Whereas private mortgage insurance (PMI) applies to conventional mortgages, MIP is required for FHA (Federal Housing Administration) loans. Both types of mortgage insurance are intended to lower the risk for lenders on home loans that involve smaller down payments.
A key difference between PMI and MIP is that MIP includes both an upfront mortgage insurance premium (UFMIP) and annual mortgage insurance premium. The UFMIP portion may be covered with a one-time payment at closing or rolled into monthly payments alongside the annual MIP.
How PMI Is Calculated
PMI is calculated as a percentage of the total mortgage loan amount annually. This often ranges from 0.5% to 1.5% but can vary based on your credit score, the loan-to-value (LTV) ratio, the type of mortgage, and other factors. For example, borrowers with a $300,000 mortgage balance would pay between $1,740 and $5,580 in PMI costs, depending on whether their PMI percentage was on the low or high end.
Borrowers with stronger credit and lower debt-to-income ratios usually pay less PMI on their home loan. The more money you put toward a down payment, the lower your PMI will be, too. Generally, PMI costs decrease year over year as monthly payments chip away at the mortgage principal.
When Does PMI Go Away?
In understanding how to get rid of PMI, it’s important to be aware of scenarios when PMI can be cancelled. You may request that PMI be removed when your loan-to-value (LTV) ratio is 80%, meaning you have 20% home equity. To calculate your home equity percentage, subtract your home loan principal (the amount you still owe on your loan) from your home value. Divide the result by your home value. This can be calculated using either the home’s current estimated price or the appraised value at purchase. In many cases, the current estimated price will be higher than the purchase price and so you may find that your equity percentage hits 20% sooner than you would have expected.
Alternatively, PMI removal can automatically occur without a request in two additional scenarios. More likely, lenders cancel PMI when the LTV ratio drops to 78%. The other possibility is when you pass the midpoint of the original mortgage amortization schedule. Put another way, PMI would go away after 15 years on a 30-year mortgage.
Recommended: Why Your Loan-to-Value Ratio Matters
Ways to Get Rid of PMI
Wondering how to get rid of your PMI? Here are a few ways to get PMI removed and save on your mortgage costs.
Wait for Automatic Termination
As outlined above, PMI is automatically terminated when the LTV ratio reaches 78% or you’re beyond the midpoint of the amortization schedule.
Although mortgage amortization allows for consistent monthly payments, it’s important to keep in mind that they’re structured to cover more interest, initially. So you might end up waiting a number of years for an automatic termination.
Request Early Cancellation
If you’ve stayed current on monthly mortgage payments and the LTV ratio dips below 80%, you can request that the lender, or mortgage servicer, remove your PMI. Keep in mind that this request must be initiated by you as the borrower, and it may involve an appraisal.
Refinance Your Mortgage
It’s also possible to get rid of PMI with mortgage refinancing. Namely, refinancing could be beneficial if your home has appreciated in value or interest rates have dropped since you took out the original mortgage. “It’s important to understand that not every mortgage refinance will save you money on interest. For example, if you extend the repayment term, you may have smaller monthly payments, but you’ll end up paying more money over the course of the loan,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi.
Reappraise Your Home
Demonstrating that your home has increased in value could help lower your LTV ratio and fast-track PMI cancellation. To do so, you can pay for a home appraisal to get a professional analysis of your home value and provide it to the lender.
Pay Down Your Principal Balance Faster
If your budget allows, you can put extra money toward the mortgage principal. This can be done as a lump sum, with biweekly payments, or extra principal payments each month. Make sure you indicate to your loan servicer that the additional funds are to be directed toward the principal.
Recommended: Should You Pay Off Your Mortgage Early?
Exceptions and Special Cases
There are situations when you might be wondering how to get PMI removed but PMI isn’t really what’s in play. For example, there are other types of loans and options for the lender to cover PMI costs.
FHA Loans
As we’ve noted, FHA loans involve MIP (mortgage insurance premiums) instead of PMI. Borrowers pay FHA MIP for the life of the loan unless they refinance or put 10% down when taking out a FHA loan. In the case of a 10% down payment, MIP is paid for the first 11 years.
VA and USDA Loans
Both types of government-backed loans do not require mortgage insurance, but they do carry annual fees. USDA loans come with an upfront guarantee fee that is 1% of the loan amount and an annual guarantee fee that is 0.35% of the remaining principal. Meanwhile, VA loans carry a funding fee that can be covered with a one-time payment at closing or rolled into the loan amount and monthly payments.
Lender-Paid PMI
Borrowers may opt to have the lender pay for PMI with an upfront lump sum at closing. Known as lender-paid PMI, this involves the borrower taking a higher interest rate and forgoing the option for cancellation.
PMI Removal Eligibility Checklist
We’ve covered how to get rid of PMI in detail but here is a rundown of eligibility requirements for quick reference.
• Loan type: You have a conventional mortgage
• Down payment: You put less than 20% down at closing
• LTV ratio: The remaining principal is 80% or less of the home value
• Payment history: You are current on mortgage payments with a good payment history
The Takeaway
Getting rid of PMI on a conventional home loan can reduce your monthly mortgage payments and free up funds for other financial goals. Although PMI automatically gets cancelled eventually, there are several ways to speed up the process of PMI removal, such as refinancing and extra payments on the mortgage principal.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
How soon can you get rid of PMI?
In most cases, you can get rid of PMI on a conventional mortgage as soon as your home equity is 20% or more. Some lenders may require you to have 25% equity if you’ve owned your home for less than five years.
What is the 2-year rule for PMI?
Lenders may require that borrowers make two years’ worth of on-time monthly mortgage payments before having PMI removed.
What credit score do you need to refinance and remove PMI?
Refinancing with a conventional loan usually requires a minimum credit score of 620. You’ll also need to have 20% equity in the home with the mortgage refinance to remove PMI.
How do you request for PMI removal?
You must submit a written request for PMI removal to your lender or mortgage servicer.
Does it cost money to get PMI removed?
PMI removal can cost money if you choose to refinance, get a fresh home appraisal, or make extra payments toward the mortgage principal. It’s also possible to wait for automatic PMI cancellation when the LTV ratio drops to 78% or you’ve passed the halfway point in the mortgage amortization schedule.
Photo credit: iStock/ TommL
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¹FHA loans are subject to unique terms and conditions established by FHA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. FHA loans require an Upfront Mortgage Insurance Premium (UFMIP), which may be financed or paid at closing, in addition to monthly Mortgage Insurance Premiums (MIP). Maximum loan amounts vary by county. The minimum FHA mortgage down payment is 3.5% for those who qualify financially for a primary purchase. SoFi is not affiliated with any government agency. †Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency. Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®
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