What is Private Mortgage Insurance (PMI) and How to Remove It

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What is PMI on a Mortgage?

What is PMI on a mortgage? Great question, right? Many people, especially first-time home buyers, hear the term PMI and have no idea what it means.

You will learn the definition of PMI and, more importantly, how to terminate it.

PMI is short for private mortgage insurance.

One of the things that many homeowners want to know is how to get rid of private mortgage insurance.

If you bought a home without making a down payment of 20% or higher, or you refinanced your home with less than 20% equity, private mortgage insurance, or PMI for short, was probably a requirement of owning your home.

When you were excited about buying the house, you may not have batted an eye at paying extra PMI payments to get your beautiful new home.

But as the months go by and you look at your mortgage bill, you may have noticed that PMI insurance is expensive.

Naturally, you want to know how to remove it immediately.

The second follow-up question I get as a real estate agent is, “when can I stop paying private mortgage insurance?”

Dropping private mortgage insurance is not that challenging if you follow a few simple steps outlined below. Let’s take a look at removing mortgage insurance premiums.

You’ll have learned what you need to know about PMI when you’re done reading.

What is Private Mortgage Insurance or PMI?

PMI or private mortgage insurance is a type of protection for conventional loan borrowers who do not put twenty percent down.

So the definition of private mortgage insurance is a type of lender insurance payable to lending institutions for securities that could be necessary when getting a loan.

Lenders will make you pay PMI, which becomes part of your mortgage payment. For example, if you purchase a property for $400,000, you’ll likely need a down payment of $80,000 to avoid paying private mortgage insurance.

The average down payment on a house for first-time home buyers is 6 percent, so many borrowers will pay PMI.

When Does Private Mortgage Insurance Go Away?

A common question from borrowers is when private mortgage insurance can be removed. Once you have 20 percent equity in your home, you can contact your mortgage lender and ask the PMI to be dropped.

Additionally, private mortgage insurance must be dropped when you reach 22 percent equity.

PMI insurance is paid on conventional mortgages. Other loan types have different types of insurance.

For example, an FHA loan has mortgage insurance premiums called MIP.

Why Do You Have to Pay Private Mortgage Insurance (PMI)?

Many of my first-time buyer clients will ask me what private mortgage insurance is. Private mortgage insurance is there for the lender. It is insurance against the possibility that you will default on your home loan.

PMI helps the lender financially in the event your home becomes a foreclosure.

Because you didn’t have the financial power to put 20% down on the house, the mortgage lender considers you a higher risk and wants to be confident that it will be covered should you stop making your payments and default on the loan.

Unfortunately, PMI can boost your monthly mortgage bill by quite a bit.

If you bought a house for $300,000 and have a PMI of 1/2%, you are looking at an extra $1500 a year in payments – or $125 a month. You could use $125 in monthly payments on something much more worthwhile.

The money going towards these PMI premiums you wish you didn’t have to pay could be going towards something that could have a more meaningful financial impact.

Private mortgage insurance, unfortunately, is purely for your lender, at your expense. You get nothing out of it (except your loan).Click To Tweet

Who Pays PMI?

If you get a conventional loan and put less than twenty percent down, you will pay PMI. A traditional mortgage is backed by Fannie Mae or Freddie Mac, and these government entities require PMI insurance with less than 20 percent down,

Several factors will influence the PMI rate, including your loan-to-value or LTV ratio, credit score, and debt-to-income ratio.

Mortgage insurance rates will be higher for borrowers with low credit scores, lower down payments, and higher debt-to-income ratios.

How Much Does PMI Cost?

You might be wondering how much is private mortgage insurance.

One of the most critical questions home buyers ask is the cost of PMI. Financial institutions use the home value as a factor to determine the cost of PMI.

Mortgage lenders will use the appraisal amount or the home’s purchase price to determine the property value. If these two figures differ, they will use the lower of the two for the home’s value.

Private mortgage insurance fees are variable. As previously mentioned, they depend on factors such as your credit score and the size of the down payment you make.

Costs associated with PMI of 0.3 percent to 1.5 percent are not uncommon.

Occasionally, you may find a lender offering a low down payment loan program without the added cost of private mortgage insurance. This loan product is always worth considering, as it could save money.

There is always the possibility that it may not be as well. A small down payment loan with no PMI typically carries a much higher interest rate.

Use a PMI Calculator to Determine The Costs

When deciding whether to go with a mortgage loan that does or doesn’t come with PMI, it is crucial to calculate the overall monthly cost of both.

When making a home purchase, financial institutions are required by law to provide the cost of PMI in their loan estimate. The loan estimate is given within three days of submitting a loan application to a lender.

Here is an excellent private mortgage insurance calculator that will estimate what you can expect to pay in PMI. Doing the PMI calculation is essential to know what you will be paying.

If you need help calculating PMI, ask your loan officer for assistance. They should offer to help calculate PMI for you anyway.

Where to Get Private Mortgage Insurance?

Borrowers do not need to worry about getting mortgage insurance. When it is required, lenders will take care of assigning it.

Understanding PMI With Different Loan Programs

Let’s examine each of the mortgage programs and their respective insurance requirements.

Private Mortgage Insurance on VA Loans

One of the significant benefits of VA mortgages is that they do not require mortgage insurance premiums. Yes, you read that correctly; no PMI.

With no PMI requirements, you can put that money elsewhere when buying a home.

To be eligible for a VA loan, you must have served or been serving in the military. The lack of paying a PMI premium is an excellent reason to consider a VA loan if you have that option.

With no PMI requirements, that saved money can be used elsewhere to help build home equity. Increasing the home’s value means more money in your pocket when selling.

Mortgage Insurance With an FHA Loan

The Federal Housing Administration sponsors an FHA loan. Homebuyers using an FHA loan can purchase a home with as little as 3,5% down.

FHA mortgage loans do not require you to pay PMI. FHA loans, however, need you to pay an upfront mortgage insurance premium and a mortgage insurance premium or MIP.

Most FHA mortgages will require MIP for the life of the loan. The FHA up-front mortgage premium gets paid at the closing either by financing it into the mortgage or by paying for it with cash.

The UFMIP will be a one-time charge. The MIP will be continuous throughout the loan term.

Mortgage Insurance With a USDA Loan

Like FHA loans, USDA loans do not have PMI. They do, however, have two forms of mortgage insurance. There is an upfront guarantee fee and an annual fee like MIP.

Even though there are two fees, the total cost is usually lower than other mortgage programs.

The upfront guarantee fee is 1 percent of the loan amount. The annual fee is .35% of the mortgage amount. The upfront guarantee fee is also known as the USDA funding fee and is paid at closing.

To qualify for a USDA loan, the property you buy has to be located in a rural area. You can ask your mortgage broker or lender to identify if a property you want will qualify.

Private Mortgage Insurance (PMI) With Conventional Loans

As mentioned, with conventional loans, you will pay PMI when you don’t have a 20 percent down payment. The types of loans are the most common; therefore, many people spend the additional cost of PMI.

Understanding the various costs of PMI based on the loan program is essential. Understanding the mortgage programs should help you decide the best way.

Everyone’s financial situation is different, so carefully thinking things through is vital.

Again, it is vital to carefully consider all the costs you will pay for any loan type. Nobody wants to overpay for a mortgage. You are just throwing your hard earned money down the toilet when doing so!

An excellent mortgage broker will tell many buyers to remember that they will want to quit paying private mortgage insurance as soon as possible.

Knowing how to cancel private mortgage insurance is paramount, so you don’t throw money out the window for any longer than necessary.

How is Private Mortgage Insurance (PMI) Paid

When you know you have less than a 20 percent down payment and will be paying private mortgage insurance, it is essential to determine how it will be paid.

You should ask the lender specifically if you have a choice in how to pay the PMI.

There are mainly four ways you can pay private mortgage insurance, including the following:

Borrower Paid Mortgage Insurance

You pay a monthly premium that is part of your mortgage payment.

This is the most common way PMI is paid. This is known as borrower-paid mortgage insurance.

Single-Premium Mortgage Insurance

You pay a one-time upfront fee at the closing. This is known as single-premium mortgage insurance.

Paying the upfront premium in one lump sum means you will no longer have this type of insurance to worry about.

Split-Premium Mortgage Insurance

Occasionally you can pay PMI in a combination of the above formats. This type of PMI is known as split-premium mortgage insurance. It is not all that common.

Federal Home Loan Protection (MIP)

As mentioned, an additional type of PMI is found with FHA loans. It is what’s called Federal Home Loan Protection (MIP). PMI comes with FHA loans and is known as MIP.

Mortgage protection insurance is a requirement for all FHA mortgages with less than a ten percent down payment. It cannot be removed without refinancing.

Lender-Paid Private Mortgage Insurance (LPMI)

LPMI is when the lender pays the private mortgage insurance premium. While this might initially seem like a win-win, you will pay for it through the loan servicer charging you a higher mortgage interest rate.

You will need to determine whether, in the long run, it will cost you less to have the mortgage servicer pay for the PMI upfront.

You will encounter these kinds of mortgage insurance when purchasing primary residences. Determining which type of mortgage insurance is best for your financial circumstances will be crucial.

Not Paying PMI By Getting a Second Mortgage

There is one alternative to avoiding paying PMI, and that is by getting a second mortgage loan to accompany the first. A second mortgage, in this circumstance, is what’s known as a piggyback loan.

The way it works with a second mortgage to avoid paying PMI is to obtain a first mortgage with an amount that equals 80 percent of the home’s value.

You also take out a second mortgage equal to the home’s sales price, less the down payment amount and the first mortgage.

For example, if you were buying a home for $400,000, you would take out the first mortgage for $320,000. You would take out a second mortgage for $40,000; your $40,000 down payment would cover the balance.

Having a second loan solves the issue of a lender requiring PMI. Having a second mortgage is a bit riskier. Borrower defaults can be higher when there are multiple mortgages.

How to Drop Private Mortgage Insurance Early

So how do you stop paying private mortgage insurance? All you have to do to get rid of PMI is pay your mortgage down to 80 percent or less.

No problem, right? Getting to the 80% level will take some time for most homeowners. It’d be helpful if you had some other options to reach the point where you could request this costly insurance termination.

After all, most people want to know how to pay off private mortgage insurance early if they can manage to do so financially.

You can consider a few options, one of which might work for you. These include the following:

Refinancing to Stop Paying PMI

You may be able to refinish your home if you think that your home has appreciated enough. If you can get a loan that accounts for less than 80% of the home’s value, then you could be able to eliminate the PMI.

There are some things to consider here, though. You want to make sure that refinancing makes financial sense. By eliminating the PMI, you must determine if the loan rate is adequate to save money.

Here is an excellent guide on how to get the best mortgage interest rate on your home loan.

Get an Appraisal to End PMI

By getting a new estimate, if your home has increased in value enough, you may be able to convince your lender to drop the PMI.

The evaluation must show that your home is valuable sufficiently to hit the 80% threshold. A lender will need to accept your proposal to eliminate the PMI based on a new appraisal.

If you have both of these, you could get the PMI removed.

PMI cancelation is a great feeling because you can put that money you’ve been paying elsewhere.

Remodeling Could Help You Stop Paying PMI

If you can rebuild your home so that it increases your home’s value enough, you may be able to hit the 80% mark and get rid of the PMI.

Not every remodeling project will achieve drastic increases in value, so be highly choosy in what you decide to do to your home.

Many homeowners will ask themselves should I remodel or move? As with refinancing, you can easily spend more money on a remodel than you will save on getting rid of PMI.

Make Larger Mortgage Payments to Eliminate PMI

Even a tiny increase in your monthly mortgage payment can significantly impact your bottom line.

Over time you can chip away at what you owe by paying $50 or $100 extra monthly.

The more you can throw at it, the faster you will get to the point of getting rid of the PMI.

You will have the added benefit of paying off your house faster, which can be an incredible relief when you finish the mortgage.

Of all early termination options, making more significant house payments is the one that will have the most benefits.

Padding your monthly mortgage payments might be part of your financial strategy anyway. For some, it makes sense. For others, maybe not.

This article shows the pros and cons of paying your mortgage early.

How to Drop Paying PMI When You Hit 80% Equity

If you have managed to pay your house down to where you owe 80% or less of your original loan amount, then contact your lender and request that the insurance is dropped – as long as you have a good payment history.

You need to make sure and not make any delay leading up to the point where you will request the insurance’s termination.

You will need to apply for PMI termination in writing.

How to Remove PMI When You Hit 78% Equity

If you get to 78% of your mortgage by making regular payments, then your lender is required to terminate the PMI without any request on your part.

The Homeowners protection act of 1998, also called the private mortgage insurance cancelation act, mandates that lenders must terminate PMI when borrowers are no longer required to pay for it.

PMI cancelation should take place immediately at this point. Federal law prevents lenders from continuing to collect unjustified PMI fees.

Of course, talking to your bank about when the termination should occur is still a good idea to ensure everything is in order. You don’t want to pay any longer than you have to.

Remember that automatic termination only occurs when you hit 78% through regular payments – not if you make extra payments. So if you did pay down your loan early, you must request the lender terminate the PMI.

If you do not make a claim, you could be looking at months and possibly years of extra payments.

How to Remove Private Mortgage Insurance on an FHA Loan?

Let’s examine how you can eliminate the MIP on an FHA loan.

To stop paying a MIP on an FHA loan, contact your lender to see if you’re about to cancel it. The date when you got your mortgage plays a significant role in whether you can cancel your mortgage insurance premiums.

You could not cancel your mortgage insurance premiums if you got your mortgage between July 1991 and December 2000.

If you purchased between January 2001 to June 3, 2013, your MIP could be canceled once you reach a loan-to-value of 78 percent.

If your loan originated between June 3, 2013, to the present, your FHA mortgage insurance premium will only be canceled once you’ve paid off your mortgage unless you put down ten percent or more.

Your MIP will be dropped after eleven years if you put down ten percent or more.

Other Requirements to Cancel Private Mortgage Insurance

According to the Consumer Financial Protection Bureau, you must meet specific requirements to remove your private mortgage insurance.

Your request must be in writing to get rid of private mortgage insurance.
There can be no late payments, and you must be current with your mortgage.
You might need to show proof there are no other loans on the home, like a home equity loan or home equity line of credit.
The lender will probably require you to get a real estate appraisal to show that your loan balance isn’t more than 80 percent of the home’s current value.

Pay Attention To Your Loan

It is always a good idea to review all your mortgage documentation to be clear on your terms and keep track of any documents your lender sends you.

By tracking your payments and ensuring how much you have paid off, you can get rid of PMI as soon as possible.

Watching the local real estate market is also wise to do as well.

There are times when the housing market can take a significant upward jump in value. The value of your home may have moved up a lot quicker than you ever thought possible.

If you think this may be the case, call an experienced local Realtor who you can consult on your home’s approximate value. You may be able to eliminate your private mortgage insurance way ahead of schedule!

Just be sure you choose a Real Estate agent who can accurately value a home. Many Realtors are feeble when it comes to figuring out home values. This is an art and skill. Sometimes it takes years before an agent can value properties correctly.

Is Mortgage PMI Tax Deductible?

You can deduct PMI from your taxes if you itemize your federal tax deductions. When your adjusted gross income goes over $100,000, your PMI deduction starts to get phased out.

When income is between $100,000 to $109,000 in AGI, the amount of private mortgage insurance you can deduct is lowered by ten percent for each $1000 in increased income.

Final Thoughts on PMI on a Mortgage

By now, you should have a firm grasp of what PMI is. It has probably become apparent that PMI is a useless expense you are paying the lender. Getting rid of PMI as soon as possible will be fiscally prudent.

You now have the road map to get it done. Hopefully, you now have a much better understanding of how private mortgage insurance works.

PMI on a Mortgage: What You Need to Know