How to Remove PMI: Everything You Need to Know
If you opted for a low down payment loan option when you bought your house, chances are your monthly mortgage payments include private mortgage insurance (PMI). This simple guide will help you understand more about when you can take off PMI and how it’s done.
The Basics of PMI: Does it Stop Automatically?
First, it’s important to understand whether you actually have PMI or not—the question of how and when you can take off PMI is only relevant to some homeowners. PMI is not the same thing as homeowner’s insurance; mortgage insurance is for certain kinds of mortgages, typically those that allow a low down payment.
If your mortgage payments include PMI, you’ll know it. It’s a monthly add-on to your mortgage payment, typically between .005-6% of your principal. It will be made clear on the account statements and bills your mortgage servicer sends to you on a regular basis.
The second most important thing to know about PMI is that, in most cases, it doesn’t need to be part of your mortgage payments forever. In fact, PMI automatically cancels (eventually) for many people who have it. According to the Consumer Finance Protection Bureau, automatic PMI cancellation kicks in “on the date when your principal balance is scheduled to reach 78% of the original value of your home,” but only if you’re current on your payments on that date. If you aren’t current on your payments by the time you reach that 78% threshold, automatic PMI cancellation will still happen once you catch up.
How Can I Remove PMI Early?
It’s nice that this cancellation happens automatically, but can PMI be removed early, before that automatic cancellation? In many cases, yes—though there are some loan types that only allow early cancellation under special circumstances. When early cancellation is allowed, it doesn’t happen automatically.
You can start the process of early cancellation when your principal balance is close to 80% of your home’s original value (in other words, when you’ve built up 20% equity). That’s a couple of percentage points before automatic PMI cancellation, and it can mean substantial savings depending on the cost of your home. Once you reach this threshold, you’ll need to follow these steps:
Step 1: Ensure a good payment history and no outstanding balance on your mortgage payments.
Step 2: Submit a written request to your servicer asking to cancel your mortgage insurance. We’ve created a sample letter that you can copy and use yourself—click here to download the PDF.
Step 3: Meet your servicer’s conditions, which may include certifying that there are no second mortgages on your home and proving that your home’s value hasn’t declined over time. You may need to order a proof of value appraisal to do this. If that step is necessary, make sure you wouldn’t spend more on that appraisal than you’d save by canceling PMI early.
If you meet all those conditions, you might end up getting rid of PMI earlier than expected, which can mean having some extra funds in your budget every month.
How to Remove PMI and Lower Your Interest Rate
Requesting early cancellation is one way to stop paying for PMI before automatic cancellation kicks in. But there is another way to cancel PMI early: refinancing. This option is only suitable for some people, though.
Let’s say you want to get rid of PMI, but you also think you can get a better interest rate. When interest conditions are favorable, a refinance to get rid of PMI might help you save even more on your monthly payments.
The first step is to make sure you meet the right qualifications for refinancing. You’ll also want to think and act carefully before taking this step. The question to ask isn’t just “can you get PMI removed by refinancing?” The better question to ask yourself is “will I save money by refinancing my mortgage to get rid of PMI?”
The answer to this question depends on a number of factors, from interest rates to closing costs. You’ll want to do the math to ensure that a refinance will be financially beneficial in the long term. Make sure to look at the big picture.
For example, if interest rates are higher than they were when you bought your home, refinancing might actually cause you to spend more over time. However, if your credit score has improved significantly since you bought your house, you could actually end up with a lower rate than you do now, even if the overall market interest rate has gone up. This is why it’s so important to consider all factors before making a decision.
When to Cancel PMI
The guidelines for how to get rid of your mortgage insurance premium without refinancing are fairly straightforward. The question of whether you should refinance is less clear. If you aren’t sure whether a refinance is the right choice, consider talking to your Mortgage Advisor for guidance on what kind of refi options might be available to you. You can also ask your Advisor questions about canceling PMI. This may be particularly helpful if you’re not sure whether your loan type allows early cancellation or not. Our Mortgage Advisors are always happy to talk and help!
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