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When Does PMI Go Away? How To Get Rid of Private Mortgage Insurance

When Does PMI Go Away? How To Get Rid of Private Mortgage Insurance
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Home.com Contributor

One of the biggest advantages to buying a house today is that you don’t need a 20% down payment. You can get a conventional loan for as little as 3% down, which can move up your homebuying timeline by years. 

But there is a tradeoff. To offset lower down payments, most loan programs have a mortgage insurance requirement.

With a conventional loan – the most common type of loan used to purchase a home – you’ll pay annual private mortgage insurance (PMI) if you put down less than 20%. But it doesn’t last forever.

So when does PMI go away? You can request that PMI be removed once you have 20% equity in the home, calculated based on the lower of the purchased price or appraised value at time of closing or based on current appraised value if you made substantial improvements to the property. The PMI requirement falls off automatically at 22% equity based on the original amortization of the loan, calculated based on the lesser of the purchased price or original appraised value.

What's in this Article?

3 ways to get rid of PMI
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How to avoid PMI altogether
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What is PMI?
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PMI vs Mortgage insurance premium vs USDA mortgage insurance
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Frequently asked questions
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 3 ways to get rid of PMI

There’s more than one way to get rid of PMI. Which way you choose depends on the equity in your home, current interest rates, and even your mortgage servicer.

Option 1: Refinance out of PMI

No matter what kind of mortgage insurance you have, know that it’s not permanent.

You can always refinance out of PMI at any time if you meet certain conditions.

First, your income and credit need to meet certain guidelines. Assuming that’s the case, you have to have around 20% equity in the property based on its current value.

Preferably, you’ll have a bit more than 20% equity so you can open a large enough loan to roll closing costs into the new loan. So 21-22% equity is ideal. If not, you can pay for closing costs in cash. But most people prefer to roll closing costs into the new loan.

Here’s an example of refinance out of PMI:

Original property value$275,000
Current property value$320,000
Existing loan balance$250,000
Refinance closing costs$3,000
New loan$253,000
Loan-to-value ratio of new loan79%
Cash out-of-pocket to close the refinance$0

The new loan will not have a PMI requirement since the loan-to-value ratio is at or below 80%.

Refinancing out of PMI is a great route because there’s no requirement to pay it for two years. You can refinance out of PMI as soon as you build enough equity and/or pay down the loan.

Keep in mind, though, that your new loan will be at current rates. If rates are higher than when you purchased, you may want PMI cancellation option 2.

Option 2: Work with your servicer to cancel PMI

To start the PMI cancellation process with your servicer, you’ll need to meet two criteria:

  • 20% home equity, based on the original amortization of the loan or by making additional principal payments
  • Two years or more since you purchased the home. Note that there is no waiting time requirement if 80% LTV reached at any time based on additional principal payments

“It’s really best to wait until you’ve been in the loan for two years because otherwise, you most likely won’t be able to go off of your new appraised value unless you’ve made significant improvements to the home,” says Jodalee Tevault, a senior mortgage consultant with Fairway Independent Mortgage Corporation in Chandler, Ariz. (Fairway owns Home.com) .

If you’ve been in the home for less than two years, your lender or mortgage servicer (the company that manages your mortgage payments), may base your PMI removal request on the original appraisal at purchase.

That appraisal would not reflect a change in local home values or any work you had done to the property.

But if you have renovated the home and/or home values have risen in your area, your lender may approve the use of a new appraisal to reflect the changed value.

Once you have 20% equity in the home, you should:

  • Contact your lender or servicer and request that PMI be removed
  • Work with them to schedule a new appraisal
  • Set aside roughly $500 for the appraisal fee, which is paid by the homeowner

The appraisal is critical to removing PMI, as your lender will need to verify that you do in fact have 20% equity.

Note that this method won’t always work. Some servicers won’t accept a new appraisal: they will always base PMI cancelation on the original purchase price. Always check with your servicer before you make plans to remove PMI early.

Option 3: Let PMI fall off automatically

The servicer will automatically terminate PMI on the date your principal balance is scheduled to reach 22% equity, based on the lesser of the purchased price or original value of the home.

However, you can fast-track removing PMI by reaching 20% home equity faster. Make extra mortgage principal payments when possible. You don’t have to double up every month, but if you get a bonus or raise, put what you can toward paying down your loan balance faster.

Again, it’s always a good idea to check your servicer’s guidelines before you pay down your loan.

How to avoid PMI altogether

Maybe you haven’t bought a home yet and you’re hoping to avoid PMI altogether. Here are some ways to do it:

  • Put down 20% on a conventional loan
  • Take out an 80-10-10 piggyback loan (see video): One mortgage for 80% of the purchase price, a second for 10% of the purchase price, and a 10% down payment
  • Use gift funds from friends and family toward your down payment to get to 20%
  • Apply for down payment assistance (DPA). You can use DPA to supplement your own savings and get your down payment amount to 20% to avoid PMI

What is PMI?

Private mortgage insurance, or PMI, is a monthly insurance premium homeowners pay when they put down less than 20% on a conventional home loan. Under the Homeowners Protection Act, homeowners are entitled to request PMI cancellation once they have 20% equity in the home. The Act also mandates that PMI stop automatically if the homeowner has 22% equity.

Paying PMI is quite common these days, as many first-time homebuyers cannot afford the traditional 20% down payment.

You can qualify for a conventional loan with 3% down, which is a huge difference.

On a $250,000 home, a 20% down payment equates to $50,000 – and that doesn’t include the several thousand dollars you’ll also owe in closing costs.

A 3% down payment on the same house would be $7,500. That’s still a lot of money, but certainly more attainable than $50,000. And if you qualify for down payment assistance, it becomes even more achievable.

Paying PMI is quite common these days, as many first-time homebuyers cannot afford the traditional 20% down payment.

The flipside of low down payment mortgages, however, is that mortgage lenders take on more risk. The lower your down payment, the more money you have to borrow and repay over time.

And the more the lender lets you borrow, the more they have to lose.

“Borrowers who make a down payment of less than 20% of the home’s cost are statistically more likely to miss payments and go into foreclosure than those with a down payment of 20% or more,” says Eric Klein, a real estate attorney in Boca Raton, Fla. “Private mortgage insurance serves as an insurance policy that safeguards lenders against this risk.”

Learn more: PMI on a Conventional Loan: Your Questions Answered

Essentially, PMI gives a mortgage lender the confidence to approve a riskier-than-usual application, “knowing that the mortgage will be paid by the PMI carrier in the event the homeowner cannot make their mortgage payments due to death, disability, sickness, or job loss,” says Fran Majidi, a financial expert with SmartFinancial Insurance in Costa Mesa, Calif.

“If you default on your mortgage – in other words, fail to make your payments – PMI steps in to pay the bill,” Majidi says. “But while PMI underwrites your mortgage lender’s investment, it does not safeguard you against the possibility of losing your home through foreclosure, nor does it cover the cost of damages to your home.”

“If you default on your mortgage – in other words, fail to make your payments – PMI steps in to pay the bill.”

Fran Majidi, financial expert with SmartFinancial Insurance

That doesn’t mean PMI doesn’t benefit you at all. PMI is what enables lenders to offer low down payment loans, which help many buyers become homeowners sooner.

And buying sooner gives you more time to build home equity, which is a pillar of long-term wealth creation and generational wealth.

PMI vs Mortgage insurance premium vs USDA mortgage insurance

Most low down payment loan programs have a mortgage insurance requirement. But they’re called different things and have different rules.

PMI is specific to conventional loans. Other types of mortgage insurance include:

  • FHA mortgage insurance premium (MIP), an upfront and annual fee
  • USDA mortgage insurance fee, also upfront and annual
  • VA funding fee, an upfront fee typically charged at closing

FHA MIP

All FHA loans have an upfront MIP of 1.75% of your loan amount. The annual fee for most FHA borrowers is 0.85%.

If you put down less than 10%, which is the most common scenario for FHA borrowers, the annual MIP remains in place for the life of the loan. If you put down 10% or more, the annual MIP ends after 11 years.

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FHA borrowers can stop paying MIP by refinancing to a conventional loan once they have 20% equity in the home.

But there are closing costs with a refinance loan. It’s important to consider how much you’ll be saving vs your closing costs, new interest rate, and whether you’ll be in the home long enough after refinancing to break even.

A lender can break down the different scenarios for you and help you understand the best ways to save.

Learn more: FHA Mortgage Insurance: How Much Will You Pay?

USDA mortgage insurance

USDA loans have an upfront and annual mortgage insurance fee. The upfront fee is 1%, and the annual fee is 0.35%. The annual fee will be in place for the life of the loan.

As with FHA loans, you can get out of the annual mortgage insurance fee by refinancing to a conventional loan after you’ve reached 20% home equity.

Learn more: Do USDA Loans Require PMI?

VA funding fee

The VA funding fee is an upfront cost that is either paid at closing or wrapped into the loan balance. A funding fee is charged each time you use your VA loan benefit, but there is no limit to the number of VA loans you can take out over your lifetime.

The funding fee may be waived for VA borrowers who have qualifying service-related disabilities.

Learn more: VA Loan Closing Costs: How Much Do You Really Need to Close?

When does PMI go away? FAQs

Does PMI automatically fall off?

PMI automatically falls off for conventional loans once you have 22% equity in the home. You can also request that PMI be removed once you reach 20% equity. You may need a new appraisal if your home value went up and you’d like to use that equity in the calculation.

How long does PMI last?

For conventional loans, PMI will remain in effect until you have 20% equity in the home. For FHA loans with less than 10% down, the annual mortgage insurance premium stays in place for the life of the loan. The annual mortgage insurance fee for USDA loans also remains in effect for the life of the loan. However, you can refinance an FHA or USDA loan to a conventional loan once you reach 20% equity.

How can I avoid PMI without 20% down?

You can take out an 80-10-10 piggyback loan, which involves a first loan for 80% of the home’s purchase price, a second loan for 10% of the home’s purchase price, and a down payment of 10%. You can also use gift funds or down payment assistance to supplement your down payment savings and get to 20%.

A win-win scenario

PMI might seem like a burden on homebuyers, but it actually enables you to buy a home with less money out of pocket. Lenders use PMI to reduce their risks until you have more financial skin in the game with the home. As your equity increases, their risk decreases until the point where you can remove PMI altogether.

Further Reading

What’s the Minimum Credit Score For a Conventional Loan?

Conventional Loans vs. FHA: Which Mortgage is Better?

Conventional Loan Mortgage Rates: Are They Rising In 2021?