If you purchase a home with less than 20% down, your lender requires you to have private mortgage insurance. This is also true if you refinance your home and take out a new loan for more than 80% of your home’s current value. The lender will roll your PMI premium in with your monthly mortgage payment, and as a result, many homeowners do not consider it as a separate cost. However, PMI is an additional cost that you can, under certain circumstances, cut out of your budget. You just need to read on and find out how to remove private mortgage insurance.
How Do You Remove Private Mortgage Insurance? A lender will only remove private mortgage insurance once you have 20% or more equity, or when you reach the halfway point of your mortgage, whichever comes first. There are, however, some perfectly legal ways to “finesse” the system and reach the critical 20% or half-way point sooner, rather than later.
What Is Private Mortgage Insurance?
When you take out a mortgage with less than 20% down, your lenders require you to take out private mortgage insurance. This insurance covers the lender against loss if a borrower fails to keep up with their mortgage payments.
Private mortgage insurance is not like other insurance policies for which you pay premiums. If the policy pays out, you do not receive the money. Instead, the payment is made to your lender. You do not have a choice over whether or not you want the insurance. Neither do you get to shop around for the best deal and go with the insurer of your choice.
With private mortgage insurance, it works like this. When you apply for a mortgage, if you have to take out private mortgage insurance, your lender will tell you how much your premium will be. The lender will include your insurance premium as part of your monthly mortgage payment.
Why Do We Need Private Mortgage Insurance?
When you take out a mortgage, you commit to paying back the amount you borrow, plus interest. For a variety of reasons, borrowers who have less than 20% of a home’s value to use as a deposit are statistically more likely to default on their mortgage. This remains true until a borrower has 20% or more equity in their home.
When a borrower defaults on their mortgage repayments, the lender must go through the foreclosure process and have the home sold to recoup their loan. This process can be costly. In addition, during the early stages of the mortgage term, the amount for which a home sells may not be enough to cover the outstanding loan.
As a result, the government backs private mortgage insurance. If a borrower defaults on their mortgage, and the lender cannot recoup their costs through the sale of the home, the government will pay the difference.
Consequently, lenders are willing to extend loans to borrowers with a deposit of less than 20%. Without the private mortgage insurance system, lenders would require a 20% deposit before they would offer a mortgage to a borrower. This, in turn, would cause a significant downturn in the real estate market, as well as the broader economy.
Why Should I Want To Remove My Private Mortgage Insurance?
You may think that as you are paying it already, there is no real need to remove your private mortgage insurance. Not only that, but the law requires lenders to remove the coverage once the loan has either hit the half-way point or has been paid down to 78% or the homes price when the mortgage was first taken out. So there’s not much difference. Right?
Let’s use an example of a borrower who wants to purchase a $300,000 home, They have $15,000 to use as a deposit and will borrow $285,000 over 30 years at an interest of 3.75%. Their total monthly payment will be $1,462. This is made up of:
- $443.07 to pay off the principal.
- $874.87 in interest
- $185.25 for the PMI
The proportion of the monthly payment that goes towards principal and interest will change during the term of the mortgage, but the total amount will remain the same.
Assuming all other variables remain the same, the borrowers will owe 80% of the value of the home at the time of the sale in month 89 of their mortgage. However, if they wait until they owe 78% of the value of the home at the time of the purchase and the lender to removes the private mortgage insurance automatically, the borrower will pay the PMI until month 100.
That means 11 extra months of private mortgage insurance, at $185.25 per month for a total of $2037.75
That is why you would benefit from removing your private mortgage insurance as soon as possible.
How To Remove Private Mortgage Insurance
There are a variety of ways in which you can remove your private mortgage insurance before you reach the 78% automatic removal point. However, there are some basic criteria you have to meet before you make your request, whichever method you use.
- Make Your Request In Writing. You must make any request for the early removal of your private mortgage insurance to your lender in writing.
- Proof Of Your Homes Current Value. The lender will want to see that your home has not gone down in value. As a result, you will have to provide and pay for an appraisal. Some lenders will accept a brokers price opinion.
- Good Payment History. To qualify for the removal of your private mortgage insurance, you must be able to demonstrate a good payment history. The lender will not consider your request for early removal if any of your payments in the last two years have been 60-days late or more. They will also decline your application if any of your payments have been 30 days late or more in the last 12 months.
- No Leins Or Loans Against The Property. If you would like your PMI canceled early, your mortgage can be the homes only debt. If you have taken out a second mortgage, a home equity loan or home equity line of credit, or if liens are in place against your home, you do not qualify for early PMI removal.
If you meet these criteria, you can either calculate in which month you hit the magical 80% mark, or you can request a schedule from your lender. Request in writing and do so many months before you may hit the 80% as the process takes some time.
Method #1: Pay Down Your Mortgage
The quickest and most effective way to have your lender remove your private mortgage insurance is to pay down your mortgage to the 80% mark.
To find out how much you need to pay your mortgage down to do this simple calculation:
- Start with the final sale price of your home when you bought it.
- Divide that purchase figure by 100%.
- Multiply the result of step 2 by 80.
The result is 80% of the value of your home at the time of purchase. This is the amount you have to pay your mortgage down to, in order to qualify for early PMI removal.
Method #2: Prove You Owe 80% Or Less Of The Current Value Of Your Home
If you have made significant improvements to your home, or if property prices have climbed in your neighborhood, you may be able to take a different route. In some cases, if you can persuade your lender that you owe 80% or less of your home’s current value, they may be willing to remove your private mortgage insurance.
First, check the value of comparable properties in your area. Then ask your lender if they would accept a broker’s price opinion (BPO) of the current value of your home or whether they require an appraisal.
Then, obtain the appropriate form of valuation and submit it to your lender, along with a letter which details why you are requesting the early removal of your PMI.
As well as meeting the previously listed criteria, you must hit one of the following benchmarks.
- You must have owned the home for at least two years AND have paid your loan down to 75% of the current value of the home.
- You must have owned your home for at least five years AND have paid your loan down to 80% of the current value of your home.
To reiterate, you must meet one of these two criteria, but only if you are requesting early removal following a current valuation. If you are paying down your mortgage to 80% of the value of the home when you purchased it, these time limits do not apply.
Method #3 Refinance Your Home
Regular readers will know my position on refinancing your home:
Don’t Do It.
If you do choose to refinance your home and the new mortgage is for less than 80% of the current value of your home, you will be able to lose your private mortgage insurance.
If you have an FHA or another government-backed loan, the only way to remove your private mortgage insurance earlier than when you meet the 78% owed mark is by refinancing your home with a private lender.
Private mortgage insurance is a necessary evil that allows many Americans, who would otherwise be excluded from the housing market, to own their own home.
The ways in which you can do so are limited, but by making an effort to have your PMI removed from your mortgage payments as soon as you hit the 80% owed mark, you can save thousands of dollars. That makes it well worth doing.
Of course, you might not need to save thousands of dollars, in which case you could always wait for your private mortgage insurance to be removed automatically at the 78% owing mark.
There are also some differences covered in Eric Jeanette’s article about FHA Loans and Mortgage Insurance Premiums.
For another real estate expert’s take on removing PMI, here is a great article from Bill Gassett
About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.
This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policy.