How To Get Rid Of PMI Early: I’ve Done It Many Times
In my few decades as a real estate investor, I’ve had my fair share of mortgages. I’ve seen it all, from the highs of property booms to the lows of market crashes.
I’ve navigated through fluctuating interest rates, tricky loan terms, and yes, the dreaded Private Mortgage Insurance (PMI).
Early in my career, I even spent some time as a mortgage broker, which gave me a unique insight into the complexities of the mortgage industry.
I am also a Chartered Financial Analyst.
Throughout these years, I’ve stumbled upon, experimented with, and successfully executed numerous strategies to get rid of PMI.
It’s been a journey of learning, understanding and implementing effective methods to reduce my financial burden and maximize my real estate investments.
In this article, I will share some of the proven methods I have used to eliminate PMI from my mortgages. I’ll explain expert ways to deal with PMI, from reducing it to getting rid of it completely.
I’ll provide tips on how you can avoid PMI altogether and even share some of my experiences where I’ve managed to use PMI to work in my favor.
Table of Contents
What Is Private Mortgage Insurance?
Private Mortgage Insurance (PMI) is a type of insurance policy that protects lenders from the risk of default and foreclosure. Lenders typically require it when homebuyers make a down payment that’s less than 20% of the home’s purchase price.
In other words, it applies to those who can’t afford a large down payment on a house.
The way it works is simple. The homebuyer pays the PMI premium, which is usually a percentage of the total loan amount. This premium is either added onto the monthly mortgage payment or paid upfront at closing.
The PMI covers the lender’s loss if the borrower defaults on their mortgage. Once the borrower has built up enough equity in their home (typically when the loan balance drops to 80% of the home’s original appraised value), they can request to cancel the PMI.
Other types of mortgage insurance work similarly but are used in specific situations. For example, FHA mortgage insurance for loans insured by the Federal Housing Administration and VA funding fee for loans backed by the Department of Veterans Affairs.
In all cases, the purpose of mortgage insurance is to cover the higher risk associated with low down payments or high-risk loans, and the borrower bears the cost.
PMI Costs By Lender
Different lenders have different guidelines and costs for private mortgage insurance.
a. Conventional Loans: If your down payment is less than 20%, you’ll likely pay PMI. It’s often billed monthly, and it typically falls off once you reach 80% equity.
b. FHA Loans: They require an upfront mortgage insurance premium (UFMIP) and an annual premium. The UFMIP is 1.75% of the base loan amount, and the annual premium ranges from 0.45% to 1.05%, depending on the loan term, loan amount, and loan-to-value ratio.
c. VA Loans: These loans do not require PMI. Instead, they come with a VA funding fee that varies based on factors such as the nature of military service, down payment, and whether the VA loan benefit has been used before.
d. USDA Loans: These loans require an upfront guarantee fee and an annual fee, regardless of down payment size. The upfront guarantee fee is typically 1% of the loan amount, and the annual fee is typically 0.35% of the remaining loan balance.
e. Other Types of Mortgage Loans: The requirements for mortgage insurance will vary depending on the specifics of the loan.
How To Get Rid Of Private Mortgage Insurance
In general to get rid of PMI you need to demonstrate to the lender that you now have sufficient equity. That amount of equity is not always 20%, I was once able to get rid of PMI with 18% equity just by asking. There are a few ways to prove sufficient equity.
Start by checking your mortgage statement to determine your current loan balance. If it’s 80% or less than your home’s original purchase price, you could be eligible for PMI cancellation.
Alternatively, if your home’s value has significantly increased since you bought it then you might want to consider getting a new appraisal. Your lender will likely want the appraisal carried out by a professional, and you’ll usually bear the cost.
You can’t just tell your lender that Zillow says your house is worth more.
Once you’ve established that you have sufficient equity, whether through repayments or a rise in your home’s value, you can formally request your lender to cancel the PMI.
Your lender’s website or customer service will tell you their process.
A lender will automatically cancel Private Mortgage Insurance (PMI) when the loan balance reaches 78% of the home’s original purchase price, provided the borrower is current on mortgage payments.
How To Get Rid Of PMI: Different Strategies
To prove that you have sufficient equity to get rid of Private Mortgage Insurance (PMI), you generally need to show that you have at least 20% equity in your home.
Here are a few steps you can take to get rid of Private Mortgage Insurance:
Check Your Loan Balance
You can find this in your mortgage statement. If your current loan balance is 80% or less than the original purchase price of your house, you might be eligible to cancel PMI.
Get An Appraisal To Get Away From PMI
If you believe your home’s value has increased enough to put your equity above the 20% threshold, you can request a new appraisal. Typically, the lender will insist that an appraiser they approve of perform the work.
The cost of this appraisal will usually fall on you, the homeowner.
Request PMI Cancellation
Once you have reached 20% equity through payments or an increase in your home’s value, you can request that your lender cancel the PMI. This request may need to be in writing.
Automatic or Final Termination Of PMI
If you don’t ask to cancel PMI, your lender must terminate it either when you get to the midpoint of your amortization schedule or when you reach 78% of the original value of your property, provided your mortgage payments are up to date.
Pay a Lump Sum To Eliminate PMI
Another way to get rid of PMI is by paying a lump sum towards your mortgage principal. This strategy can work if you come into a large amount of money, such as an inheritance or bonus from work.
This strategy makes sense if you have the cash on hand and if the cost of PMI is high. It’s also advantageous if you plan on staying in your home long-term because you’ll save on interest costs over the life of the loan.
Take Out Another Loan to Pay a Lump Sum To Remove PMI
Another strategy is to take out another loan, such as a 0% interest credit card or a personal loan, to pay a lump sum towards your mortgage. This essentially shifts your debt from your mortgage to another loan.
The benefit of this strategy is that you could potentially get rid of PMI without having to use your own cash. However, this approach requires careful consideration.
While a 0% interest credit card could provide a short-term solution, keep in mind that this is typically a promotional rate and the interest could skyrocket after the promotional period ends.
If you’re considering this strategy, you need to be confident that you can pay off the new loan before the interest rate increases. Consider the fees with the new loan, such as balance transfer fees for credit cards, and compare these costs with the PMI payments you’re trying to eliminate.
Remember, the exact process and requirements can vary depending on your loan agreement, so you should always consult with your lender or financial advisor to understand the specifics of your situation.
Tips for saving money on PMI
If you’re looking to save money on PMI, here are some tips to consider:
If you can afford it, making a larger down payment can help you avoid PMI altogether. Different lenders may offer different PMI rates, so it’s worth shopping around to find the best deal.
A piggyback loan is a second mortgage that can help you avoid PMI by allowing you to put down less than 20% on your primary mortgage.
PMI myths and misconceptions
There are several myths and misconceptions about PMI that are worth addressing:
While PMI can be an added expense, it can also help you qualify for a mortgage that you wouldn’t otherwise be able to get. There are several ways to get rid of PMI, such as paying down your mortgage or refinancing your loan.
While mortgage interest is tax deductible, PMI is not.
PMI alternatives: How To Avoid PMI
If you’re looking for alternatives to PMI, here are some options to consider:
As mentioned earlier, piggyback loans are a type of second mortgage that can help you avoid PMI by allowing you to put down less than 20% on your primary mortgage.
If you’re a veteran or active-duty service member, you may be eligible for a VA loan, which doesn’t require PMI. FHA loans are another type of mortgage that doesn’t require PMI. However, they do require an upfront mortgage insurance premium and an annual premium.
PMI and home values
PMI can have an impact on home values. Here’s what you need to know:
Since PMI is an added expense, it can make your monthly payments higher and reduce your purchasing power. However, if you’re able to get rid of PMI, it could increase your home equity and improve your overall financial situation.
To mitigate any negative effects of PMI on home values, consider making extra payments towards your principal balance or refinancing your loan when possible.
What Is The Difference Between PMI and MIP?
PMI and MIP are both types of mortgage insurance that protect lenders in case borrowers default on their loans. However, there are some key differences between the two:
PMI is required for conventional loans when borrowers put down less than 20% of the purchase price. MIP is required for FHA loans regardless of the down payment amount. For FHA loans with a down payment of 10% or more, the mortgage insurance premium (MIP) is required for 11 years, not the entire life of the loan.
With PMI, borrowers typically pay a monthly premium that’s added to their mortgage payment. With MIP, borrowers pay an upfront premium at closing as well as an annual premium that’s added to their monthly payment.
With conventional loans, PMI typically lasts until borrowers have paid off at least 20% of the home’s value. With FHA loans, MIP lasts for the life of the loan unless borrowers refinance into a non-FHA loan.
PMI Is Not Always A Bad Thing
PMI and paying discount points are often scary ideas for people. But you can use PMI to save money on your mortgage. On the house we are living in, instead of a large down payment, I paid a lot of points.
In less than 3 years the PMI was gone but I had the much lower interest rate for the remainder of the mortgage.
This mortgage hack was confusing to even the mortgage broker, but it’s a brilliant way to save a lot of money over the life of your mortgage. (I had to show him and the underwriters my excel model that showed it was a great idea).
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