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Private mortgage insurance (PMI) has been around for more than 60 years, helping make mortgages more affordable for buyers who can’t afford a 20 percent down payment. Loans with PMI certificates have often accounted for a decent percentage of mortgages issued each year. In fact, in 2019, that number was just below 40 percent.
But PMI does add an expense to your home loan, and you likely want to sidestep it if possible. Find out below if you can avoid PMI, or learn how to remove PMI if you’re already paying it.
What is PMI?
PMI is insurance, but don’t get it confused with homeowner’s insurance—that’s a different product you might need to pay for. PMI is insurance for the lender. It’s meant to be a fail-safe to help a lender recover losses if you default on the loan.
Lenders require that you purchase PMI in cases where you aren’t putting at least 20 percent down on your home. Most commonly, you pay PMI as part of your monthly mortgage payment. In rarer cases, you might pay all of the PMI as a lump sum when you close on the home or pay a partial lump sum and pay the rest in your monthly mortgage payments.
Regardless of how you pay, PMI can be an expensive addition to your mortgage. It’s important to note, however, that PMI works differently with FHA loans and certain other government-backed loans. For example, FHA loans have MIP, which is a mortgage insurance premium, instead of PMI.
What factors affect the cost of my PMI?
According to Freddie Mac, PMI can cost on average between $30 and $70 extra per month for every $100,000 you borrow. So, if you’re borrowing $200,000 for 30 years and you pay PMI for half of that term, you could pay between $60 and $140 per month for 15 years—or 180 months. That’s between $10,800 and $25,200 added to your mortgage.
The exact amount you pay for PMI depends on a variety of factors, including:
- Size of down payment (the more you pay up front, the less risk there is to the lender because the home has some equity—or profitability—built in)
- Credit score (the higher your score, the less risky of a borrower you appear to lenders)
- Loan appreciation potential
- Borrower occupancy
- Loan type
How can I avoid PMI?
In today’s mortgage market, it can be difficult to steer clear of PMI altogether. But here are some things you can do, depending on your situation, to avoid this expense.
Make a 20 percent down payment
If you can make a 20 percent down payment, you typically avoid PMI. That’s because PMI kicks in when you owe more than 78 to 80 percent of the value of the home. Assuming the home you’re purchasing is priced at or below its appraisal value, paying 20 percent up front automatically gets you enough equity to not need to pay for PMI.
Get a VA loan
VA loans don’t require a down payment at all, and no matter what, they don’t come with PMI. These loans are reserved for qualifying veterans and their eligible beneficiaries.
Get a piggyback loan
A piggyback loan is a second mortgage or home equity line of credit that you take out at the same time you take out your first mortgage. You use the piggyback loan to fund all or part of your down payment so you can meet the 20 percent requirement. If you consider this option, make sure to do the math to determine which saves you the most money: paying PMI or paying the interest on the second mortgage.
Request lender-paid mortgage insurance
In some cases, the lender might be willing to take on the burden of the PMI cost. They would do so through lender-paid mortgage insurance, or LPMI. Typically, the lender charges a higher rate of interest in exchange for this favor. Again, it’s important to do the math to find out which one is in your best interest.
How can I remove PMI once I have it?
As a homeowner, you have some options for removing PMI once you have it. You can take some of the actions summarized below, but the Consumer Financial Protection Bureau notes that you must also meet four criteria to protect your right. Those are:
- Asking for the PMI cancellation in writing
- Being up to date on payments and having a generally solid payment history
- Certifying, if required, that there are no other liens on your mortgage
- Providing evidence, if required, that the property value has not fallen below the original value of the home when you purchased it
If you can fulfill these criteria, here are some ways you can cancel your PMI.
Get enough equity in your home
The PMI Cancellation Act, or Homeowners Protection Act, mandates PMI cancellation when your principal mortgage balance reaches 78 percent of the value of the property (or you can also think of it as you reaching 22 percent equity). At that point, lenders must remove PMI. If you want, you can ask for PMI cancellation as soon as you reach 20 percent equity, but lenders aren’t required to remove PMI at that point.
Lenders are also required to tell you when you will reach the point of PMI cancellation if you continue to pay on your loan as agreed. You can calculate where you are in the process at any time by taking your current loan balance and dividing it by the amount the property originally appraised for. For example, if you owe $170,000 and the property appraised for $200,000, you are at 85 percent.
Get halfway through your mortgage term
Values can rise and fall, but you’re not stuck with PMI forever. Lenders must remove PMI when you’re halfway through your mortgage regardless of values. So, if you have a 30-year loan, your PMI should be canceled at the 15-year mark.
Refinance your mortgage
Another way to remove PMI is to remove your mortgage altogether. If you can arrange it so you meet the 78 percent value requirement on a new mortgage, you avoid PMI.
Get a reappraisal
Perhaps your home has gone up in value substantially and you owe much less than 80 percent of the current value. If you can demonstrate this, the lender may remove PMI because there’s less risk involved with the loan.
Remodel your home
If your home hasn’t gone up in value on its own, you might be able to add value with a remodel. Certain types of remodels, such as kitchen upgrades, could add enough value to impact the loan-to-value ratio so you don’t need PMI anymore.
Getting rid of PMI can be a great way to save money on your mortgage, but always remember to follow good personal financial management. Look at all your options and run the numbers to ensure you’re not spending more than you would save. If you’re already considering a home remodel, tossing PMI to the curb is a great perk. But you might not want to put in $30,000 worth of remodel costs just to save $10,000 in PMI, for example.
Finally, while you’re dotting the i’s and crossing the t’s on your mortgage expenses, make sure you don’t lose track of other financial matters. Keep an eye on your credit report, and if you find something that looks wrong, consider working with Lexington Law on credit repair.
Reviewed by Vince R. Mayr, Supervising Attorney of Bankruptcies at Lexington Law Firm. Written by Lexington Law.
Vince has considerable expertise in the field of bankruptcy law. He has represented clients in more than 3,000 bankruptcy matters under chapters 7, 11, 12, and 13 of the U.S. Bankruptcy Code. Vince earned his Bachelor of Science Degree in Government from the University of Maryland. His Masters of Public Administration degree was earned from Golden Gate University School of Public Administration. His Juris Doctor was earned at Golden Gate University School of Law, San Francisco, California. Vince is licensed to practice law in Arizona, Nevada, and Colorado. He is located in the Phoenix office.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.