How to Refinance and Get Rid of Pmi
Some homebuyers just can't avoid PMI, or private mortgage insurance. This coverage can add hundreds of dollars to your monthly mortgage payment — and it benefits your lender, not you, in the event of default.
There is a bright side, though: As you build up your home equity, there are several paths to ditching PMI.
What is PMI, or private mortgage insurance?
PMI is a type of mortgage insurance that protects the lender in case you default on your mortgage.
Homebuyers who use a conventional mortgage with a down payment of less than 20 percent usually are required to get private mortgage insurance. This is an added annual cost — about 0.3 percent to 1.5 percent of your mortgage balance, although it can vary.
According to Freddie Mac, each month, borrowers generally might pay between $30 and $70 in PMI for every $100,000 of loan principal. How much you pay depends on your credit score, your mortgage and loan term, and the amount of your down payment. Your PMI is recalculated each year based on the current size of your loan balance, so the premium will decrease as you pay down the loan.
"Private mortgage insurance protects the lender from the elevated risk presented by a borrower that made a small down payment," says Greg McBride, CFA, Bankrate's chief financial analyst. "Once the borrower has a sufficient equity cushion, the PMI will be removed."
PMI doesn't apply to all mortgages with down payments below 20 percent. For example, government-backed FHA loans and VA loans with low or zero down payment requirements have different rules. Private lenders sometimes offer conventional loans with small down payments that don't require PMI; however, there are typically other costs, such as a higher interest rate, to compensate for the higher risk.
4 ways to get rid of PMI
Option 1: Pay down your mortgage for automatic or final termination of PMI
The federal Homeowners Protection Act gives you the right to remove PMI from your home loan in two ways:
- You can get "automatic" or "final" PMI termination at specific home equity milestones.
- You can request to remove PMI when you reach 20 percent home equity.
The lender or servicer must automatically terminate PMI when your mortgage balance reaches 78 percent of the original purchase price — in other words, when your loan-to-value (LTV) ratio drops to 78 percent. This is provided you are in good standing and haven't missed any mortgage payments.
The servicer also must stop the PMI at the halfway point of your amortization schedule. For example, if you have a 30-year loan, the midpoint would be after 15 years. If you have a 15-year loan, the halfway point is 7.5 years.
The servicer must cancel the PMI then — depending on whether you've been current on your payments — even if your mortgage balance hasn't yet reached 78 percent of the home's original value. This is known as final termination.
Who this affects: Removing PMI in this way works for folks with conventional mortgages who have paid according to their original payment schedules and have reached the milestones of 22 percent equity or the halfway point in time. To be eligible, you must be up to date on your payments.
Option 2: Request PMI cancellation when mortgage balance reaches 80 percent
Instead of waiting for automatic cancellation, you have the right to request that the servicer cancel PMI once your loan balance reaches 80 percent of the home's original value. If you're making payments as scheduled, you can find the date that you'll get to 80 percent on your PMI disclosure form (or you can request it from your servicer).
If you have the cash to spare, you can get there faster by making extra payments.
You can prepay the principal on your loan, reducing the balance, which helps you build equity faster and save on interest payments. Even $50 a month can mean a dramatic drop in your loan balance and total interest paid over the term of the loan.
Some borrowers choose to apply a lump sum toward their principal or even make an extra mortgage payment per year. That will get you to the 20 percent equity level faster. To estimate the amount your mortgage balance needs to reach to be eligible for PMI cancellation, multiply your original home purchase price by 0.80.
Who this affects: Homeowners can use this method once they have achieved 20 percent equity. You must also do the following to cancel PMI:
- Make the PMI cancellation request to your lender or servicer in writing.
- Be current on your mortgage payments, with a good payment history.
- Meet other lender requirements, such as having no other liens on the home (i.e., a second mortgage).
- If required, you might need to get a home appraisal. If your home's value has declined, that would mean you have yet to reach that 20 percent equity and might not be able to cancel PMI.
Option 3: Refinance to get rid of PMI
When mortgage rates are low, you might consider refinancing your mortgage to save on interest costs or reduce your monthly payments. At the same time, refinancing might enable you to eliminate PMI if your new mortgage balance is below 80 percent of the home value. It's a double dose of savings.
The refinancing tactic works if your home has gained substantial value since the last time you got a mortgage. For example, if you bought your house four years ago with a 10 percent down payment, and the home's value has risen 15 percent since then, you now owe less than 80 percent of what the home is worth. Under these circumstances, you can refinance into a new loan without having to pay for PMI.
With any refinancing, you'll want to weigh the closing costs of the transaction against your potential savings from the new loan terms and eliminating PMI.
Who this affects: This strategy works well in neighborhoods where home values are on the upswing. If your home value has declined, refinancing could have the opposite effect — you might be required to add PMI if your home equity has dropped.
Refinancing to get rid of PMI typically doesn't work well for new homeowners. Many loans have a "seasoning requirement" that requires you to wait at least two years before you can refinance to get rid of PMI. So if your loan is less than two years old, you can ask for a PMI-cancelling refi, but you're not guaranteed to get approval.
Option 4: Reappraise your home if it has gained value
In a hot real estate market, your home equity could reach 20 percent ahead of the loan payment schedule. In this case, it might be worth paying for a new appraisal. If you've owned the home for at least five years, and your loan balance is no more than 80 percent of the new valuation, you can ask for PMI to be cancelled. If you've owned the home for at least two years, your remaining mortgage balance must be no greater than 75 percent.
Appraisals for a single-family home typically cost between $250 and $500, depending on your area. Some lenders might be willing to accept a broker price opinion instead, which can be a substantially cheaper option than a professional appraisal. On the flip side, professional appraisals are highly regulated and provide an unbiased assessment.
Who this affects: Borrowers who live in areas that are particularly red-hot might have seen their home values shoot up in the last couple years. In fact, the value might have increased enough to bump you out of the PMI range. If this is the case, it's time to talk with your lender about getting a new appraisal and potentially cancelling your PMI requirement.
If you've added amenities or renovated your home, that might have increased the value, as well, which could also mean more equity. Whether it's a renovated kitchen, replacement windows or an extra room, common upgrades like these can increase your home's value. If you cross the 20 percent equity finish line in the process, then you can kick PMI to the curb.
Your PMI rights under federal law
Homeowners who pay for PMI should be aware of their rights under the Homeowners Protection Act. This federal law, also known as the PMI Cancellation Act, protects you against excessive PMI charges. You have the right to get rid of PMI once you've built up the required amount of equity in your home. Lenders have different rules for cancelling PMI, but they have to let you do so.
Before you sign a mortgage with PMI, ask for a clear explanation of the PMI rules and schedule. This will enable you to accurately track your progress toward ending the PMI payment. If you feel your lender is not following the rules for eliminating PMI, you can report your complaint to the Consumer Financial Protection Bureau.
Remember: You might be able to eliminate PMI under a few other circumstances, too, such as when your home value rises or when you refinance the mortgage with at least 20 percent equity.
Next steps: Don't drain your bank accounts to escape PMI
When it comes to how to get rid of PMI, you don't need to be overzealous. While paying PMI each month — or as a lump sum each year — is no financial joyride, be careful not to make your finances worse by hustling to get rid of PMI.
Most financial experts agree that having some liquidity, in case of emergencies, is a smart financial move. So before you tap your savings or retirement funds to reach that 20 percent equity mark, speak with a financial adviser to make sure you're on the right track.
"There seems to be a philosophical aversion to PMI on the part of many buyers that is misplaced," McBride says. "As long as you're not taking an FHA loan, you're not married to the PMI. You can drop it once you achieve a 20 percent equity cushion, which may only be a few years away depending on home price appreciation. But do not feel the need to use every last nickel of cash to make a down payment that avoids PMI, only to leave yourself with little in the way of financial flexibility afterwards."
With additional reporting by Jeanne Lee
Learn more:
- How much does a home appraisal cost?
- PMI federal income tax deduction returns
- Should you refinance your mortgage even if it means paying PMI?
How to Refinance and Get Rid of Pmi
Source: https://www.bankrate.com/mortgages/removing-private-mortgage-insurance/