How to Get Rid of PMI?

When you buy a home and you put less than 20% down, the home buyer must have what’s called private mortgage insurance (PMI) on a Conventional loan.  This is a requirement on mortgage loans that have less than a 20% down payment and this is something your mortgage lender will take care of for you.  The nice thing about PMI on a conventional loan it is possible to remove the PMI and in this article we are going to share how to get rid of PMI.

What is PMI?

Private mortgage insurance (PMI) is a type of insurance that protects the lender in the event that a borrower does not make their payments on a mortgage or defaults on a loan.  If this were to happen the lender would be reimbursed for a portion of the unpaid balance on the loan.

As we explained above, private mortgage insurance is required on a mortgage loan when a buyer puts down less than 20% as a down payment.  Mortgage insurance is required on both conventional and FHA loans but the difference is on an FHA loan the mortgage insurance premium (MIP) stays on the loan for the life of the loan but on a Conventional loan the PMI can be removed.  Our focus for this reason will be on conventional loans and how to get rid of PMI from a conventional loan.

PMI is often confused with other types of home insurance:

Homeowners insurance:  this insurance is required by the mortgage lender and it insures the homeowner against damage to the home or even a loss of the home due to something like a weather event such as a hurricane or a fire.

Mortgage Life Insurance protection:  this type of optional insurance provides insurance to the designated beneficiary for the death of one or more of the homeowners.

There are two types of mortgage insurance when using conventional loan financing:

Borrower Paid Mortgage Insurance (MI):  this is the most common type of MI used and is simply an amount is added to a buyers monthly mortgage payment to cover the MI premium required to insure the mortgage loan.

Lender Paid Mortgage Insurance (MI):  this lesser known and not as popular option allows a buyer to avoid adding an amount to their monthly mortgage payment.  While that seems like an attractive option, the downside of this choice is that LPMI can not be cancelled, and it will remain on the mortgage for the life of the loan.

Mortgage Insurance, Single Premium:  this is one of my favorite options for home buyers that have a bit of extra funds to work with.  This option allows home buyers to make a one-time payment to “buy-out” the mortgage insurance and remove that from your monthly mortgage payment.  Even if you are putting less than 20% down on a conventional loan, if you have some funds to work with this is a great option to get in to a conventional loan at less than 20% down and have no private mortgage insurance.

When Does PMI Go Away?

Private mortgage insurance (PMI) can only be removed on a conventional loan when the homeowner has 20% equity in the home.  This 20% equity point can be reached through a combination of paying down the principal on your mortgage, and your home appreciating in value until you reach the 20% equity point.

An example of 20% equity might look like this.  You buy a home for $250,000 and you put 5% down as your down payment.  For three years you make your payments on time and the home appreciates nicely because you bought in a great neighborhood.  The home is now worth $300,000 and you owe $240,000 on your mortgage.  You now have $60,000 equity in your home which is 20% of the new value.

For Lender paid Mortgage Insurance (LPMI) this will stay on your loan forever and the only way to have it removed from your mortgage is to do a refinance to remove it.

How to Get Rid of PMI?

When you are at a point where you feel you have 20% equity in your home you will want to reach out to your loan servicer and request that your PMI be removed.  The loan servicer will most likely require that you get an Appraisal on your home which you will need to pay for, and as long as the value comes back at the 20% equity level your PMI will be removed.

Remember, on an FHA loan the mortgage insurance stays on the loan for the life of the loan so the only way to have it removed is to refinance the FHA loan in to a Conventional loan when you reach 20% equity.

PMI:  Conventional Loans vs FHA Loans

On a conventional loan homeowners have the option to remove the PMI when the level of equity gets to 20%.  That can happen via home appreciation, or the homeowner pays enough down on the principal balance of the home.  Removing the PMI from your mortgage payment has many benefits and chief among them is to lower the monthly payment that is paid.

The monthly mortgage payment savings can be substantial for removing the PMI so achieving this goal is well worth the effort.  Many homeowners have PMI payments that are $100 – $200 per month so lowering the monthly payment by that amount can be a tremendous savings on the monthly mortgage payment.

As explained earlier, removing the PMI doesn’t always have to be done via a mortgage refinance.  When you already have a conventional loan there is no need to refinance your mortgage to remove the PMI.  Simply call your loan servicer to request the PMI removal and that will start the process.

For those homeowners that have an FHA loan, the process to remove the PMI is a little different.  On an FHA loan, the mortgage insurance remains on the loan for the life of the loan and it can not be removed.  So, the only way to have the mortgage insurance removed if you have an FHA loan is to refinance out of an FHA loan in to a conventional loan.

Again, the rules on this are the same whether you have an FHA loan with PMI insurance or an FHA loan.  You must wait until you have 20% equity to begin the process.  In the case of a homeowner with an FHA loan, simply reach out to your lender and request to do a mortgage refinance out of your current FHA loan in to a conventional loan.  The required appraisal will confirm the value of your home and as long as you have the 20% equity you will be able to remove the PMI.

I can certainly help you if you’d like to refinance your mortgage.  Reach out to me anytime via email at steve@thehomebuyinghub.com or by phone.