Paying for private mortgage insurance (PMI) may make it easier to buy a home. PMI, which is usually required if you’re putting less than 20% of the home’s value down, protects the lender in case you default on your loan. It makes lenders more likely to approve your loan application.
However, PMI does come with a major downside, namely the upfront and annual fees. Most homeowners are eager to get out of making those payments as soon as possible. If you have PMI now, here’s a rundown on when and how you’ll be able to get rid of it.
How to Get Rid of PMI: 4 Options
PMI isn’t meant to last forever. Once you have adequate equity and/or a long history of loan payments, you should no longer need PMI.
Depending on what your loan balance is, how far you are into your mortgage, and the value of your property, you may be able to cancel sooner than you think.
Here are four ways you can get rid of PMI payments.
1. Pay Down Your Loan Balance
Lenders are required to automatically cancel your mortgage insurance once you’ve reached a 78% loan-to-value (LTV) ratio—meaning you have a 22% equity stake in the property (either its appraised value or the initial purchase price, whichever is lower). The larger your initial down payment and/or the more you pay down your loan’s principal balance, the faster you’ll get to this point.
Your lender won’t terminate your PMI unless you’re current on your payments. If you’re behind, catch up before the cancellation date.
2. Ask Your Lender to Cancel It
If you can prove that your LTV ratio has reached 80%—meaning your loan balance is 80% of your home’s value or less—you can request that your lender cancel your PMI. Your lender will calculate the date on which you'll reach 80% if you adhere to your original payment schedule, which you can find on the PMI disclosure form. However, if you’ve made additional payments since you bought your home, this date may arrive sooner than stated.
To do this, you’ll need to:
- Make the request in writing
- Be current on your payments
- Certify that you have no second mortgages or additional liens on the house
Your lender may also require a new appraisal to ensure your home still holds its original value—particularly if you’ve made any improvements to the property.
If home values have increased in your area or you’ve made improvements since moving in, you may be closer to an 80% LTV ratio than you think.
Consider a new appraisal to confirm your new home’s value. Then, calculate your LTV ratio like this: current loan balance / appraised value = LTV.
3. Wait It Out
If you have an interest-only or balloon payment loan and home values in your area aren’t rising, you may not accrue equity quickly. However, time is on your side. Mortgage lenders are required to cancel PMI once you reach the halfway point in your loan’s term. On a traditional, 30-year mortgage loan, this would be the 15-year mark. In most cases, however, you’ll reach a 78% loan-to-value before your halfway point.
4. Refinance Your Mortgage
If your equity has increased since you took on your existing loan, and mortgage rates have dropped, refinancing may allow you to drop PMI and reduce your monthly payment even further.
Keep in mind that there are costs associated with refinancing, so you need to crunch the numbers to make sure that it’s a cost-effective move. If you’re close to the point where your lender would automatically cancel your PMI, it may not be worth it.
The Bottom Line On Removing PMI
PMI may be necessary to help you purchase a home, but it can also be costly. Make sure you know at what point you’ll be eligible to cancel your PMI, and if you come into extra cash, consider a refinance to both remove PMI and lower your monthly costs. If you do opt to refinance, be sure to shop around. Rates and terms vary across mortgage lenders.