How to Get Rid of PMI on a Conventional Loan
If you purchased your home with a conventional loan and put less than 20% down, you’re likely paying for private mortgage insurance (PMI). The same holds true for homeowners who have a conventional refinance with less than 20% equity.
For some borrowers, this PMI cost may be under $100 per month. Others, though, could be on the hook for far more.
Luckily, PMI doesn’t last forever. Lenders are required to remove it at a certain point in your repayment schedule. However, there are some ways that you can get rid of PMI even sooner.
How to Get Rid of PMI Without Refinancing
Technically, you do not need to do anything to get rid of private mortgage insurance. Federal law requires lenders to automatically remove PMI once you reach specific milestones in your repayment schedule.
However, you can request that your lender cancel the PMI sooner if you have built up at least 20% equity and meet a couple of other basic requirements.
Lenders Will Automatically Remove PMI After 22%
The Homeowners Protection Act of 1998 (colloquially called the PMI Cancellation Act) requires lenders to automatically cancel a borrower’s private mortgage insurance once they reach 78% loan-to-value (LTV) on their mortgage. From a homeowner’s perspective, this occurs when you’ve built 22% equity in your property.
Lenders are also required to end private mortgage insurance once borrowers reach the midpoint in their repayment schedule. This practice is called final termination and occurs regardless of the remaining loan balance.
However, nearly all borrowers with fully amortized mortgages reach 22% equity before halfway through their loan term.
You Can Request PMI Cancellation
Homeowners can request a PMI cancellation in writing as soon as their loan balance reaches 80% of their property’s original value, so long as they don’t have:
Any late mortgage payments within the past year
More than one 30-day late payment within the past two years
Any second mortgages or subordinate liens reducing their equity
Your PMI disclosure form, provided when you obtained your mortgage, will list the date you are scheduled to reduce your loan balance to 80%.
In certain situations, your lender may require you to complete an appraisal or broker price opinion to eliminate PMI. This ensures that your property's value has not decreased and that you truly have at least 20% equity.
If you're requesting PMI cancellation because market forces have driven your home's value up, there are some other rules to follow:
In most cases, you must have had your loan for at least two years.
After two years, you can request an appraisal and remove PMI if you have at least 25% equity.
After at least five years, you can request PMI cancellation with the standard 20% equity.
If the value increase is due to improvements you've made to the property, your lender could waive the two-year requirement.
These conventional guidelines are for single-unit primary residences and second homes. If you’re trying to use a reappraisal to get rid of PMI on a two-to-four unit primary residence or an investment property, you must have had the loan for at least two years and reached a minimum of 30% equity.
Conventional loans are typically not assumable, but if you have taken over a mortgage through divorce or inheritance, you will need at least a two-year payment history to remove PMI through reappraisal.
Note: These reappraisal restrictions only apply when getting rid of private mortgage insurance with your current lender. There is no waiting period or requirement above 20% equity if you’re refinancing your loan.
How To Get Rid of PMI With Equity: 7 Ways
Are you tired of paying more each month than you need to? Here are seven ways to get rid of PMI by building 20% home equity (aka reaching the 80% LTV mark) as quickly as possible.
1. Make Your Regularly Scheduled Payments
You can eliminate your PMI simply by making your regularly scheduled mortgage payments. The date you'll hit 80% LTV is specified on the PMI disclosure form you received with your mortgage documents.
2. Make Principal Reduction Payments
Nearly all lenders allow you to make extra mortgage payments towards reducing your principal. These principal reduction payments do not impact the amount that you owe each month, but they shrink your balance faster and allow you to reach 20% equity sooner.
3. Do a Cash-In Refinance
A cash-in refinance is when you make a principal reduction payment as part of the refinancing process. Most borrowers only do a cash-in refinance to remove PMI when they already plan to refinance for other reasons.
4. Do a Mortgage Recast
A mortgage recast is another option where you can make a large principal reduction payment to get rid of PMI. When you recast your mortgage, your lender takes your new lower balance and re-amortizes it over your remaining loan term. Recasting reduces your monthly payments without changing the length of your mortgage.
5. Make Home Improvements
If you've made substantial improvements or renovations to your home, the added value may qualify you to remove PMI. This typically means significant changes such as doing a complete interior overhaul, adding additional bedrooms or bathrooms, putting in value-adding features such as a pool or accessory dwelling unit, or even just doing a major kitchen upgrade.
6. Order a New Appraisal
Have properties in your area seen drastic appreciation since you took out your loan? If rising home values put you below 80% LTV, you may be able to order a new appraisal and eliminate your PMI payments.
However, this is only a practical way how to get rid of PMI after two years of ownership if you have at least 75% equity. Otherwise, conventional loan guidelines require you to have had your mortgage for at least five years.
7. Refinance to a Different Loan Type
PMI is associated with conventional loans. Most borrowers have options such as FHA, VA, and USDA loans, which do not require private mortgage insurance. However, each government-backed alternative has its own insurance-like program: the FHA charges a mortgage insurance premium (MIP), the VA a funding fee, and the USDA a guarantee fee.
Do All Loan Types Require PMI?
All conventional loans following the guidelines established by Fannie Mae and Freddie Mac require borrowers with a loan-to-value above 80% to have PMI. Similarly, most non-qualifying conventional loans require it as well.
However, some specialty products, such as doctor mortgage loans, may allow borrowers with less than 20% equity to avoid paying for private mortgage insurance.
How Much Does PMI Cost?
The cost of private mortgage insurance varies from borrower to borrower, primarily based on their loan amount, loan terms, loan-to-value ratio, and credit score.
However, other factors that could increase your PMI cost include:
In some situations, factors such as having multiple borrowers on the mortgage or taking out a loan as part of an employee relocation program could slightly lower PMI costs.
Furthermore, PMI got its name because private companies offer it. Fannie Mae recognizes eight different PMI providers. While rates are generally very similar, you may see some variation depending on the provider that your lender works with.
Frequently Asked Questions About Getting Rid of PMI
Are you tired of paying for PMI but still have questions about getting rid of it? Here are more answers to some of the most commonly asked inquiries.
Are There Special Rules for How to Get Rid of PMI if Home Value Increases?
If you're relying on an increase in your home's value to get rid of PMI through a reappraisal, there are a few special rules to follow. For most cases, you'll need to have had your loan for at least two years; although if you've had it for fewer than five years, you'll need at least 25% equity. These rules only apply to your existing mortgage, not to a home reappraisal as part of a refinance.
Does PMI Go Away After 20% Equity?
Yes, but not on its own. You need to request, in writing, that your lender cancel your private mortgage insurance once you’ve established 20% equity based on your property’s original value. If you do nothing, PMI will automatically go away once you reach 22% equity.
Can I Remove PMI Without Refinancing?
Yes, you do not need to refinance to remove PMI. You can request your lender drop it when your loan reaches 80% of your home's original value. Federal law requires them to do so once the loan reaches 78%. But if refinancing allows you to lower your interest rate, it may be worthwhile if the new appraisal lets you remove PMI at the same time.
To see if you can get rid of PMI by refinancing, check out current refi rates and apply with a reputable mortgage provider.
