Private Mortgage Insurance (PMI) is an extra cost that many homeowners pay when they take out a conventional loan with a down payment of less than 20%. While PMI protects the lender in case of default, it does not benefit the borrower directly. Fortunately, PMI is not a permanent expense, and there are several ways to remove it, potentially saving homeowners hundreds of dollars per month.
In this guide, we will explore what PMI is, when you can remove it, and the different methods for eliminating PMI from your mortgage.
What is PMI and Why Do You Pay It?
Private Mortgage Insurance (PMI) is a fee that lenders require when a borrower finances more than 80% of a home’s purchase price. This means that if you put down less than 20%, you are required to pay PMI as part of your monthly mortgage payment.
How Much Does PMI Cost?
PMI costs typically range between 0.5% and 2% of the loan amount annually, depending on:
- Credit score (higher scores = lower PMI rates)
- Down payment amount (higher down payment = lower PMI rates)
- Loan type (fixed-rate vs. adjustable-rate mortgage)
For example:
- Home price: $300,000
- Loan amount (90% financing): $270,000
- PMI rate: 1%
- Annual PMI cost: $2,700 ($270,000 × 1%)
- Monthly PMI payment: $225 ($2,700 ÷ 12 months)
Since PMI is an added cost, many homeowners want to remove it as soon as possible.
When Can You Remove PMI?
You can remove PMI once you reach 20% equity in your home. This means that your loan balance must be 80% or less of your home’s current market value.
Here are the main ways PMI can be removed:
- Automatic PMI Cancellation – When the loan balance reaches 78% of the original home value.
- Request PMI Removal – When you reach 80% loan-to-value (LTV), you can ask your lender to cancel PMI.
- Home Reappraisal – If your home has appreciated in value, you can remove PMI sooner by getting a new appraisal.
- Refinancing Your Loan – If interest rates are favorable, refinancing can help remove PMI and lower your monthly payments.
- Making Extra Payments – Paying down your mortgage faster can help you reach 20% equity sooner and cancel PMI earlier.
1. Automatic PMI Cancellation (Lender Must Remove PMI)
The Homeowners Protection Act (HPA) of 1998 requires lenders to automatically cancel PMI when:
- Your loan balance reaches 78% of the original home value (based on the initial purchase price).
- You are current on your mortgage payments.
For example:
- Home price: $300,000
- Loan balance: $234,000 (78% of the original price)
- The lender will automatically remove PMI without you needing to request it.
💡 Tip: If you want to remove PMI sooner, you can request cancellation at 80% LTV instead of waiting for 78%.
2. Request PMI Removal at 80% LTV
Lenders allow borrowers to request PMI cancellation when their loan balance reaches 80% of the home’s original value. You must:
✅ Make on-time mortgage payments.
✅ Submit a written request to your lender.
✅ Provide proof of home value (if required).
Example:
- Home price: $300,000
- Loan balance reaches $240,000 (80% of the original value)
- You submit a request, and PMI is removed!
💡 Tip: If you want PMI removed as soon as possible, keep track of your loan balance and submit a request as soon as you reach 80% LTV.
3. Remove PMI with a Home Reappraisal (Faster Removal)
If your home value has increased due to market appreciation or home improvements, you may reach 20% equity faster than expected. In this case, you can:
- Order a home appraisal from a lender-approved appraiser.
- Provide the new home value to your lender.
- Request PMI cancellation based on the updated LTV.
Example:
- Home price (when purchased): $300,000
- New home value (due to appreciation): $350,000
- Loan balance: $270,000
- New LTV: 77% ($270,000 ÷ $350,000)
- Since the LTV is below 80%, you can request PMI removal!
💡 Tip: Home values vary, so check with a real estate agent or online home valuation tools before paying for an appraisal.
4. Remove PMI by Refinancing Your Mortgage
If interest rates are lower than your current mortgage rate, refinancing can help you:
✅ Eliminate PMI by getting a new loan at 80% or lower LTV.
✅ Lower your interest rate, reducing overall mortgage costs.
✅ Change loan terms, such as switching from an adjustable-rate mortgage (ARM) to a fixed-rate loan.
Example:
- You originally bought a home for $300,000 with 10% down.
- After a few years, your home’s value increases to $350,000.
- You refinance your remaining loan balance of $250,000.
- Your new LTV is 71% ($250,000 ÷ $350,000), so no PMI is required!
💡 Tip: Consider refinancing only if you plan to stay in your home long enough to recover closing costs.
5. Make Extra Payments to Remove PMI Faster
Making additional principal payments on your mortgage can help you reach 80% LTV sooner and eliminate PMI earlier.
Ways to pay down your mortgage faster:
✅ Make biweekly payments instead of monthly payments.
✅ Add extra payments toward the principal each month.
✅ Apply tax refunds, bonuses, or windfalls to the mortgage principal.
Example:
- Your loan balance is $250,000.
- Instead of paying the regular $1,500 monthly payment, you pay $2,000 per month.
- You reach 80% LTV faster, allowing you to remove PMI sooner.
💡 Tip: Check with your lender to ensure extra payments go toward the principal, not just interest.
Conclusion
PMI can be a costly expense, but it does not have to be permanent. By keeping track of your loan balance, home value, and available options, you can remove PMI and reduce your monthly mortgage payment.
Key Takeaways:
✅ PMI is automatically removed at 78% LTV.
✅ You can request PMI cancellation at 80% LTV.
✅ A home appraisal can help remove PMI sooner if your home value has increased.
✅ Refinancing can eliminate PMI and lower your mortgage rate.
✅ Making extra payments can speed up PMI removal.
If you are still paying PMI, check your mortgage balance and home value today to see if you can eliminate PMI and start saving money! 🚀