How to Get Rid of PMI and Save Thousands on Your Mortgage

Nearly 800,000 home buyers purchased homes with down payments of less than 20%, thanks to Private Mortgage Insurance (PMI). While PMI enables homeownership with lower upfront costs, it adds to your monthly expenses.

The good news? You can eliminate this cost. This blog explores effective strategies to remove PMI, potentially saving you thousands over the life of your mortgage.

Private Mortgage Insurance (PMI) is an insurance policy that protects lenders against the risk of borrower default. It is typically required for conventional loans when the down payment is less than 20% of the home's purchase price.

PMI allows borrowers to secure a mortgage with a smaller down payment, making homeownership more accessible.

The cost of PMI varies depending on several factors, including the size of the loan, down payment amount, and credit score. On average, PMI costs around 1.50% of the loan amount annually. For example, if you have a $300,000 mortgage, your PMI could cost about $4,500 annually.

Yes, PMI can be removed under certain conditions. Federal law mandates that lenders automatically cancel PMI when the loan balance reaches 78% of the home's original value or at the midpoint of the loan term.

Additionally, borrowers can request cancellation once they reach 80% equity in their home. This requires a written request and may involve an appraisal to confirm the home's current value.

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Understanding the different types of mortgage insurance helps to determine how to remove them.

BPMI is paid by the borrower as part of their monthly mortgage payment. It can be canceled once certain equity thresholds are met, typically when the loan-to-value ratio reaches 80%. You can formally request cancellation from the lender, who may require an appraisal to verify home value.

LPMI is paid by the lender upfront and typically results in a higher interest rate for the borrower. Unlike BPMI, LPMI cannot be canceled; it remains in effect for the life of the loan unless the borrower refinances. This option may be beneficial for those who prefer not to make monthly insurance payments but can result in higher overall borrowing costs.

Eliminating PMI can lead to substantial savings. Here are several strategies to consider:

By law, lenders must cancel PMI when your mortgage balance reaches 78% of the home's original value. This process is automatic and doesn't require action from you. However, it may take many years to reach this point, depending on your loan terms and payment schedule.

Here, you don't have to wait for automatic cancellation. You can proactively request cancellation once you reach 80% equity in your home. To do this:

• Contact your lender in writing
• Ensure you’re current on all mortgage payments
• Confirm that there are no additional liens on your property
• Be prepared for an appraisal if required by your lender.

This approach allows you to stop paying PMI sooner than waiting for automatic termination.

Making extra payments towards your principal balance can help you reach the 80% LTV threshold more quickly. Consider options like:

• Making biweekly payments instead of monthly

• Adding an extra payment each year

• Making lump-sum payments when possible.

These strategies not only reduce your principal faster but also help to eliminate PMI sooner.

You might even consider recasting your mortgage after a lump sum payment to lower monthly payments while still progressing toward PMI removal.

If interest rates have dropped since you obtained your mortgage or if you've built significant equity through appreciation or payments, refinancing might be a viable option. This can help you secure a new loan without PMI if your new loan amount falls below 80% of your home's current value.

A significant increase in your home's market value can reduce your LTV ratio. In this case, you can request your lender to remove PMI based on the new appraisal. You'll need to hire a professional appraiser, and if the appraisal confirms a lower LTV, you can petition your lender to cancel PMI.

Investing in home improvements can increase your property’s value and help you reach that crucial equity threshold more quickly. Focus on renovations that are known to add value:

• Kitchen remodels

• Bathroom upgrades

• Landscaping improvements.

These enhancements not only improve livability but can also lead to a higher appraisal value when it's time to remove PMI.

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Historically, FHA mortgage insurance premiums were tax-deductible, subject to income limitations and legislative extensions. However, as of the 2022 tax year, this deduction is no longer available.

You should consult with a tax professional or check IRS guidelines to determine if you qualify for any deductions related to MIP.

Learn more about what is FHA Mortgage insurance? And how it works.

Removing MIP from an FHA loan can be difficult, but there are options available.

• Refinance to a Conventional Loan: If you have built up at least 20% equity in your home, you can refinance into a conventional loan. This will eliminate MIP. Keep in mind that refinancing involves closing costs, typically ranging from 2% to 5% of the loan amount.
• Loan Origination Date Matters: If your FHA loan started before June 3, 2013, you can cancel MIP when your loan balance hits 78% of the home's original value. However, for loans after this date with less than a 10% down payment, MIP lasts for the life of the loan.
• Put Down More Than 10%: If you made a down payment of at least 10%, your MIP will automatically terminate after 11 years. This option provides some relief for those who can afford a larger initial payment.
• Streamline Refinance: If you refinance within three years of obtaining your FHA loan, you may be eligible for a refund on part of your upfront MIP. This can reduce your overall costs when switching to a new loan.

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