Private mortgage insurance—a common part of the home buying process. Private mortgage insurance (PMI) increases your monthly mortgage payments, but there are ways to reduce it or even get out of it.
But before we jump in and explore your options, you need to understand what PMI is.
What is PMI?
Private mortgage insurance is a safety net for your lender on your home loan. If you are unable to continue paying your mortgage, your lender is covered through private mortgage insurance.
If you have PMI, it’s likely you put down less than 20% of the house’s value when you bought it.
Where do PMI Payments Go?
PMI payments go to the mortgage insurance company your lender works with. Mortgage insurance companies work like any other type of insurance company: they get paid monthly in exchange for the promise of covering their clients when things take a turn for the worse.
How is PMI determined?
Several different factors make up your PMI calculation. This includes your loan-to-value ratio, or how the size of your loan compares to the value of your home.
Another factor is the loan term or the length of your home. And, of course, your credit score is taken into consideration
Is PMI negotiable?
Because your PMI is calculated based on a series of specific factors, it’s non-negotiable.
So why is PMI so common? PMI makes buying houses possible for those who would otherwise be unable to afford it.
The Benefits of Getting Rid of PMI
Before getting rid of your PMI, it’s nice to see the benefits.
PMI is Expensive
You’re probably here because you know that PMI adds onto your mortgage payment.
But just how much?
Most private mortgage insurance is around 0.5% to 1% of your home loan annually. That means if you have a $100,000 mortgage, you’d likely pay between $41.66 and $83.33 extra per month.
If your mortgage is double that at $200,000, then you’d be paying between $83.33 and $166.66 every month.
PMI Payments Don’t Go Towards Your Mortgage
Because PMI payments are insurance for your lender, your PMI payments go to the mortgage insurance company. That means your monthly PMI payments don’t help you pay off your mortgage.
To be clear: PMI is different from mortgage life insurance, also known as mortgage protection insurance. Mortgage life insurance agrees to pay off your mortgage for you when you die.
PMI is No Longer Deductible as of 2017
Private mortgage insurance was deductible through 2016 for those with lower incomes. The Tax Relief and Health Care Act gave lower income Americans a tax break on PMI through 2015. This was extended through 2016 thanks to the Protecting Americans from Tax Hikes (PATH) Act.
The Mortgage Insurance Tax Deduction Act of 2017 was introduced on the House floor in January 2017. Since then, PMI is no longer deductible.
The Nitty Gritty on PMI: Rules & Regulations
To understand the ways to get around PMI, you must first understand the rules.
The Most Important Thing You Need to Know About PMI
If there’s one thing to remember about private mortgage insurance, it’s this:
To get rid of PMI, you must have at least 20% equity in the house.
In other words, you have to have 20% of your house paid off, or only owe 80%. This is thanks to the Homeowners Protection Act, also known as the PMI Cancellation Act.
Your Rights for Terminating PMI
Besides paying off 20% of the house’s value, there are other rules when it comes to canceling your PMI. Brush up on the basics to make sure you know your rights and the process for getting rid of PMI.
Requested Termination
Requesting termination is the fastest way to get rid of PMI. Once you’ve paid 20% of the house’s original appraised value or sale price, you can ask your lender to cancel PMI.
If you’ve been making payments on time and you’re up-to-date on payments, PMI termination should go smoothly. If your payment history is a bit rockier, you may have to wait for automatic termination.
Automatic Termination
If you don’t request termination by the time you have 80% left of the house to pay off, don’t worry—automatic termination kicks in when you owe 78%. In other words, your lender cancels your PMI once 22% of your house has been paid off
Keep in mind that for automatic termination, you have to keep up with your mortgage payments
Final Termination
If you didn’t qualify for requested or automatic termination, you still have a chance to end it with final termination. This happens when you meet the half-way point of paying off your loan.
You have to be up-to-date on your payments in order for your PMI to make final termination.
Don’t worry if you currently aren’t up-to-date on these payments. You can get your PMI canceled with final termination once you catch up.
Other Borrower Rights
Before canceling your PMI, take some time to learn the details.
For instance, your lender will tell you at closing how long it will take until you can cancel your PMI. They’ll also give you an annual statement with information on how to cancel your PMI.
When you cancel your PMI, make sure to do it in writing.
If you want to get rid of PMI as early as possible, you have to be current on payments and have a decent payment history. You also have to prove that you have no other liens on the house.
A lien on your house is when someone claims part of the value of your house.
If you haven’t made all of your mortgage payments, you may have to follow special rules designed to protect your lender. For instance, you may have to prove that the balance on the home loan isn’t more than 80% with a new appraisal.
Special Home Loans: FHA and VA Loans
It’s important to note that if your home loan is an FHA loan, you can’t cancel FHA insurance. However, you could get rid of FHA insurance by refinancing into a non-FHA-insured home loan.
If you have a VA home loan, congratulations—you don’t have PMI.
How to Save Money on Your PMI
To save money on your PMI, you have two methods:
- You can work to get 20% your house paid off as fast as possible.
- You can get rid of PMI altogether.
Get 20% of Your House Paid Off Faster
To get 20% of your house paid off ASAP, you can:
- Work on increasing the value of your home,
- Work on paying off your home loan faster, or
- Do both.
Increasing Home Value to Get Rid of PMI
If the value of your house has increased, then you’re closer to paying off 20% of the house than before.
For instance, let’s say you bought your house for $100,000. You put down $10,000 and took out a home loan of $90,000. That means when you bought the house, you had 10% of the house paid off and 90% left to go. Here’s the math:
- $90k / $100k = 90% owed
- 100% house – 90% owed = 10% of the house paid off
If—for whatever reason—the value of your home rose from its initial $100,000 to $115,000, the math changes. Instead of having 90% left to pay off, you now have 78% left to pay off. That means you’ve paid off over 20% of your house—goal reached! Here’s the math on that:
- $90k / 115k = 78.26% owed
- 100% house – 78.26% owed = 21.74% paid off
If the value of your house goes up, all that value goes towards you, which can help you get rid of PMI sooner.
Here are some ways you can increase the value of your home:
Refinance
If the value of your house rises by a decent amount since you bought it, you can refinance your home loan. Refinancing your home loan means you’d be switching out your old loan with a new loan. The old loan reflects the older, lower value of your house. The new loan would reflect the current, higher value of your house.
Refinancing is a great option because it can increase the value of your house and lower your monthly interest payments. That means you’ll be saving money in two ways instead of one, so it’s definitely worth looking into.
New Appraisal
The idea of getting a new appraisal is similar to refinancing, except you’re sticking with the same loan. If the value of your house has risen since you bought it, your lender could let you get a new appraisal that reflects the higher value of your home.
The new value would be used to recalculate how much of your home loan you have paid off. This could get you to the 20% equity in the home that you need to cancel PMI.
DIY
If the value of your home hasn’t risen just by sitting there, you can always increase the value of your house yourself through renovations and remodeling. Get the most bang for your buck by renovating old bathrooms and kitchens. Consider adding new features to the house, like another room or a pool.
If you do decide to DIY to increase the value of your home, it’s a good idea to make sure you have any permits that you might need to make sure your work gets counted towards the value of your house.
Photo by H E N G S T R E A M on Unsplash
Pay Off Your Home Loan Faster to Get Rid of PMI
You can also pay off your home loan faster to get rid of PMI sooner. Putting more money than you need towards your home loan is often referred to as “prepaying.”
If you have a home loan, it’s mostly likely an amortized loan. Because amortized loans behave similarly to compound interest loans, putting a little extra money towards your mortgage each month can have large, compounding effects. In other words, paying more now will save you a lot more down the road.
Get Rid of PMI Altogether
The moment you’ve been waiting for: how to get rid of PMI altogether. There are two ways you get can around paying PMI. Even though they might be more expensive in the long-run, they do get you out of your PMI quickly.
Get Two Loans, a.k.a. Piggyback Mortgage
You can get around paying PMI by taking out two loans instead of one to cover the cost of your house.
Here’s how it works:
The first loan you take out will be 80% of the value of the house, clearing that loan for PMI.
The second loan covers the rest of what you need to buy the house, along with your down payment.
Using this piggyback mortgage method can bring higher interest rates than a one-loan mortgage. Make sure you find out if a piggyback mortgage would actually save you money, compared to your current mortgage, before jumping the PMI ship.
Get Lender Paid Mortgage Insurance (LPMI)
Another way to avoid PMI altogether is to get a loan with lender paid mortgage insurance, or LPMI. With LPMI, the lender pays for the mortgage insurance.
Of course, there’s a catch: loans with LPMI have a higher interest rate for the entire term of the loan. With normal PMI, you pay more upfront, but can eventually get out of it once you’ve paid off 20% of your house. With LPMI, you make payments until the loan is completely paid off.
Find Your Best Option to Save on PMI
You can use multiple tactics to get rid of PMI faster. For instance, you can refinance your home, renovate the old bathroom, and put a bit extra towards your mortgage each month to get closer to having 20% equity in your home.
Or, you could ditch PMI altogether by switching out your current mortgage for a piggyback mortgage or LPMI loan.
Whichever path you choose, make sure you compare the costs of each option for your particular situation before making any big moves. Talk to your local Mortgage Consultant to find the option best for you.