Private mortgage insurance (PMI) is a pretty common expense for homeowners. In fact, according to a report from the Urban Institute Housing Finance Policy Center, about a quarter of all 30-year fixed-rate conventional mortgages originated from 1994 to 2022 had PMI.
While PMI can allow you to make a smaller down payment and qualify for a loan more easily, it can also be expensive, increasing your monthly payment by potentially hundreds per month.
Fortunately, there may come a day when you can cancel PMI and put that money back in your pocket. Here’s a closer look at what PMI is, how it works, and how you can (one day) get rid of it.
Read more: What is mortgage insurance?
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Private mortgage insurance, or PMI, is a safeguard for mortgage lenders if you put down less than 20% when you take out a conventional loan to buy a house. This insurance policy protects the lender — not you — if you default on the loan. If you fail to make your payments, PMI will kick in and help the lender recoup their losses, much like other types of insurance policies do.
Because of this protection, PMI can make it easier to qualify for a loan, enabling mortgage lenders to approve riskier borrowers — those with lower credit scores or smaller down payments, for instance. According to Freddie Mac, it costs about $30 to $70 per month for every $100,000 borrowed.
A quick note: PMI is only for conventional loans. With Federal Housing Administration (FHA) loans, it’s called an FHA mortgage insurance premium, or MIP.
Learn more: The best low- and no-down-payment mortgage lenders
You won’t pay private mortgage insurance forever, at least if you stay in your home for a while.
The Homeowners Protection Act of 1998 requires mortgage lenders to automatically cancel PMI once your loan-to-value ratio reaches 78%, which means your mortgage balance is 78% of your home’s value or less. Another way of looking at this is that your lender would need to remove PMI once you have a 22% equity stake in your home.
You can also request that your PMI be canceled — in writing, directly with your lender — when your LTV ratio reaches 80%. So, if your home is worth $400,000, you could request that your PMI be canceled once your mortgage balance reaches $320,000 (80% of its value) or less. Your lender would have to automatically cancel it once it reaches $312,000 (78%).
Mortgage lenders must also cancel PMI at the halfway point of your loan’s amortization schedule. For example, if you have a 30-year mortgage and it’s already past the midpoint of your loan’s amortization schedule — 15 years, in this case — the lender must cancel your PMI even if your LTV ratio hasn’t reached 78% yet. This is known as final termination.
Private mortgage insurance can add hundreds of dollars to your monthly mortgage payment. If you can’t afford to have your PMI payments eat into your budget anymore, try getting rid of it early through one of these four strategies.
As mentioned above, instead of waiting for your PMI to go away automatically, you can ask your mortgage lender or servicer to cancel it on the date your LTV ratio is scheduled to fall to 80% — in other words, when you have 20% equity in your home.
Your mortgage lender or servicer is legally required to accept your PMI cancellation request if you meet all of the following requirements:
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Your request is in writing
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You’re current on all of your payments
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There are no second mortgages, including home equity loans or lines of credit (HELOCs), on your home
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You can provide evidence, through a home appraisal or other methods, that your property hasn’t lost value since you bought it
As you pay down your mortgage balance, you will gain more equity in your home and move closer to the potential PMI cancellation date. You can typically monitor your balance using an online dashboard with your mortgage servicer; if that’s not available, check your monthly statements to determine when you’ve reached the 80% point.
Dig deeper: How much is your house worth? How to determine your home equity.
Besides paying down your loan balance, you can reach the 20% home equity benchmark faster if your home increases in value. This might happen organically if home prices rise in your neighborhood, or you can help things along by investing in improvements that make your home more valuable.
In either case, if you think your home has gained substantial value since you bought it, it may be worth scheduling a professional home appraisal to determine its updated value and prove to your lender that you qualify for PMI cancellation.
But here’s the caveat: If you’ve only been in the home for two to five years, your LTV ratio must be no more than 75% of the home’s new appraised value. If you’ve been there longer, the loan balance can be up to 80% of the new valuation. Also, some lenders require you to use specific appraisers, so check with your lender before spending hundreds of dollars on an appraisal.
If interest rates have dipped since you took out your mortgage, refinancing your mortgage could help you qualify for a lower rate and ditch your PMI — as long as the new loan balance is less than 80% of your property’s value.
Before applying for a refinance, consider the closing costs to ensure it won’t cost you more than you’ll save in the long run. Use a mortgage calculator or talk to a mortgage professional to help figure out whether refinancing makes financial sense.
Read more: The best mortgage refinance lenders
If you have the cash to spare each month, consider making larger or more frequent mortgage payments to build up your home equity faster.
Multiply your original home purchase price by 0.80 to determine the amount your loan balance needs to be to qualify for private mortgage insurance cancellation. And if you’d rather have your lender automatically remove your PMI instead of requesting a cancellation, multiply your original home purchase price by 0.78 to see what the outstanding mortgage principal should be.
You can also put any windfalls you come into — like tax refunds, inheritances, or holiday bonuses — toward your mortgage balance. This will help you reach that 78% to 80% mark sooner too.
Remember, your loan must be current to be eligible for PMI removal, and you must not have any delinquent, skipped, or insufficient payments.
Private mortgage insurance costs vary depending on factors like the size of your down payment, credit score, and loan term, but you can expect to pay about $30 to $70 per month for every $100,000 you borrow. So if your mortgage balance is $300,000, PMI will add anywhere from $90 to $210 to your mortgage payment every month.
Removing private mortgage insurance from your monthly payment can certainly be advantageous, but there are also potential drawbacks to it. Here are the pros and cons to consider before removing your loan’s PMI.
Eliminating PMI has one large, overarching benefit: More money in your pocket. To give you a better idea of all the ways you can save money, here are the pros of canceling PMI:
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You’ll reduce your monthly mortgage payment by potentially hundreds per month.
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You’ll enjoy more monthly cash flow, which can make it easier to save, pay off debts, or handle unexpected expenses.
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You may free up funds to put toward investments or other financial goals.
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You can start paying down your mortgage principal faster, allowing you to get out of debt quicker than previously possible.
Most of the drawbacks to eliminating PMI have to do with the strategies you’d use, such as refinancing, increasing your property’s value through home improvements, or ordering a new appraisal. Here are some potential cons:
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If you refinance to remove PMI, it will come with refinancing closing costs, which may outweigh your savings in the long run.
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You’ll need to pay for a new appraisal if your home’s value has changed (these usually cost about $500, depending on where you live and how big the house is).
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Putting extra cash toward your mortgage can deplete your savings or make it harder to achieve other financial goals.
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Using home improvements to increase your house’s value can get expensive.
Removing private mortgage insurance is typically worth it because it reduces your monthly mortgage payments, saving you money in the short and long term. Once you’ve built enough equity in your home, ditching PMI means you can allocate more funds to shrinking your mortgage balance or other financial goals rather than insurance premiums.
Before choosing a PMI cancellation method, though, you should weigh the costs against your potential savings. Consider talking to a financial advisor to determine the approach that makes the most sense for your situation.
Yes, refinancing isn’t the only way to get rid of your PMI. Other ways to remove PMI include waiting until you qualify for automatic termination, requesting PMI cancellation when you reach 20% home equity, or getting a new appraisal if your home’s value has increased.
Your PMI payments are calculated by multiplying your total loan amount by the PMI rate. Let’s say your total loan amount is $500,000, and the PMI rate is 0.4%. In this case, your annual PMI premium is $2,000, which is equal to around $167 monthly. Generally speaking, Freddie Mac estimates that you’ll typically pay between $30 and $70 per month for every $100,000 you borrow.
PMI on conventional loans is not permanent. If you stay current on your mortgage payments, your PMI will automatically go away once your LTV ratio reaches 78% or your mortgage term has reached the halfway point. You can also eliminate the PMI early through other methods, such as refinancing or requesting cancellation from your lender.
Once your PMI is removed, your monthly mortgage payment will decrease. You could then redirect that extra savings toward other goals, like paying down credit card debt or building a cushy emergency fund.
The fastest way to get rid of PMI is to pay down your mortgage balance aggressively. Once your balance reaches 80% of the home’s value, you can request that your lender cancel PMI and remove it from your monthly payment.
Laura Grace Tarpley edited this article.
