Jordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor's degree in business finance, his experience as a top perf.
Jordan Tarver Lead Editor, Mortgages & LoansJordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor's degree in business finance, his experience as a top perf.
Written By Jordan Tarver Lead Editor, Mortgages & LoansJordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor's degree in business finance, his experience as a top perf.
Jordan Tarver Lead Editor, Mortgages & LoansJordan Tarver has spent seven years covering mortgage, personal loan and business loan content for leading financial publications such as Forbes Advisor. He blends knowledge from his bachelor's degree in business finance, his experience as a top perf.
Lead Editor, Mortgages & Loans Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Updated: Nov 17, 2021, 11:52am
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If you have to pay private mortgage insurance (PMI), you’re likely looking forward to the day your home equity hits 20% of the home purchase price so you can be released from PMI payments on your mortgage.
Better yet, rising home values might make it increasingly possible for you to get an earlier discharge than expected. However, don’t get carried away with online home value estimates—lenders are the ones who define PMI removal eligibility thresholds.
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When a homebuyer does not have at least a 20% down payment for a house financed by a conventional loan, they will likely have to get private mortgage insurance (PMI)—an added cost that’s usually built into your monthly loan payment. Most homebuyers have to get PMI due to not having as large of a down payment. In fact, the median down payment was 12% in 2019, according to a National Association of Realtors survey.
PMI provides extra financial protection for your lender against a potential default or foreclosure. The amount of PMI is determined when your mortgage is being finalized. It usually ends up costing between 0.58% and 1.86%.
Lenders will seek PMI estimates from multiple sources when preparing your loan, and you will see the monthly cost in your loan estimate (LE) and closing disclosure (CD). If you believe the PMI cost is too high, you can check with the lender to see if they can work with a different PMI provider at a lower cost.
Most conventional loans that are backed by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, require PMI for a down payment lower than 20%.
Other loans backed by the federal government often have arrangements that are similar to PMI or nothing at all. If you can secure a U.S. Department of Veterans Affairs (VA) loan, you’ll pay no mortgage insurance. However, U.S. Department of Agriculture (USDA) loans require borrowers to pay a guarantee fee, and Federal Housing Administration (FHA) loans require borrowers to pay a mortgage insurance premium for the life of the loan.
It’s possible that your PMI payment could disappear without you taking action. Two situations can trigger that: when your principal balance reaches 78% of your original home value or when you are halfway through the full term of your loan. Both situations are possible because of the federal Homeowners Protection Act (HPA).
The HPA also allows you to request cancellation of your PMI when your mortgage balance hits 80% of the original home value—the contract sales price or appraised value of your home, whichever is lower.
“These are general guidelines—the guidelines can vary depending on the state, the type of loan, the investor, whether it’s a primary residence or investment property, the loan payment history and whether or not the customer has made significant improvements to their home, which may change the value of the property,” says Sean Grzebin, head of consumer originations for Chase Home Lending
If you don’t want to wait at least a few years until you reach the 20% equity threshold to have your PMI removed, you have three other options.
There are several ways you could build your equity at a faster rate, which would help you meet the PMI removal threshold quicker.
For example, you could make extra payments toward your principal during the year, such as sending all or part of your tax return to the mortgage loan servicer. Or, you could make larger monthly mortgage payments. For example, you can divide your mortgage payment by 12 and make 1/12 of the extra payment every month, resulting in a larger payment by the end of that year.
If your home value has increased from when you took out your mortgage, you might discover that your equity has gone up to at least 20%.
A lender won’t just take your word for it, though. You’ll likely need to get a new appraisal—at your expense—so that a professional third-party source can confirm your new home value. An appraisal can cost several hundred dollars, so confirm that your lender will accept the evaluation of a real estate broker, which could cost less.
Before you hire an appraiser, check with your lender to make sure you’re following their regulations for PMI removal.
Refinancing your mortgage is another way to remove the PMI from your current mortgage.
If you know your home value is sufficient enough that you can get a new mortgage with at least 20% equity, refinancing may be a good move if you can:
You’ll need to see if refinancing is worth it because if your interest rate is the same or similar to your current one, it could cost you more money to refinance than you’d save on the removal of the PMI. And if you end up rolling the closing costs into your new loan, that might knock your equity back under 20%, especially if your appraisal comes in lower than expected.
Requirements for discharging PMI depend on the type of loan.
For example, for Fannie Mae-owned loans, if you’ve had it between two and five years and it’s your primary or second home, you could get PMI removed if the home value has appreciated enough to move the current LTV ratio to 75%
Also, if you have a loan for an investment property through Freddie Mac and your home value increased enough to request PMI removal, you would need to have a current LTV rate of 65% and have made mortgage payments for at least two years. You also shouldn’t have any 30-day late payments for the last year or 60-day late payments for the last two years.
Fannie and Freddie’s regulations also change if you’ve had the loan for less than two years but have made significant improvements on the home that has increased its value.
If you’ve run the numbers and discovered that you may be eligible for PMI removal, contact your loan servicer about its specific removal process.
The requirements will vary by lender, but you’ll typically need to make the request in writing, have a good payment history, no other liens on the property (such as a home equity loan or line of credit) and agree on how you will get a professional estimate on your home value.
As you fixate on the numbers that show an increase in your home’s value and equity, consider what it might cost if you try to remove your PMI costs. While a new appraisal or valuation might end up being worth the cost, more expensive actions—such as refinancing—might make you lose money in the long run.
Bob Musinski contributed to this article.
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