How to get rid of PMI

Lenders generally require private mortgage insurance when a borrower puts down less than 20% on a home purchase.

This insurance protects the lender in case you stop making payments on your loan. The amount you pay every month for private mortgage insurance, or PMI, will vary depending on your situation, but you can generally expect to pay between $30 and $70 each month for each $100,000 borrowed.

Since these monthly payments can add up, figuring out how to get rid of PMI can potentially save you hundreds — or even thousands — of dollars a year. Here are some steps you can take to remove PMI from your mortgage loan.

• Can PMI be removed early?
• Can PMI be removed if my home value increases?
• Is removing PMI worth it?

Can PMI be removed early?

PMI can feel like a penalty if you don’t have a 20% down payment, but there are several ways you can get it removed. Under the federal Homeowners Protection Act, you can get rid of PMI by requesting cancellation or by waiting for automatic termination.

Unless you’ve already gotten PMI removed, loan servicers must end PMI when you’re halfway through paying your loan. For example, at the 15th year of a 30-year loan.

Here are four ways to get rid of PMI.

1. Wait for PMI to end automatically

Federal law requires loan servicers to terminate PMI on the date your loan balance is scheduled to reach 78% of the original value of your property — meaning you’ll have 22% equity in your home.

If you’re not current on your payments, PMI will be canceled on the first day of the first month after you catch up on payments.

2. Request PMI cancellation

If you’re watching the principal balance of your mortgage fall as you make your loan payments, you don’t have to wait until you reach the 78% threshold for automatic removal.

Federal law allows you to submit a written request for PMI removal, which would start when the principal balance of your loan is scheduled to reach 80% of the original value of the property.

Other qualifications for PMI cancellation include being current on your mortgage payments and having a good payment history. Additionally, your lender might ask you to prove that you don’t have a second mortgage on your home — such as a home equity loan or home equity line of credit. And you may have to pay for a home appraisal to show that the home’s value hasn’t fallen below its original value.

3. Refinance to get rid of PMI

Mortgage refinancing can provide a lot of benefits, including potentially eliminating PMI. When you refinance a home loan, the new lender will typically require an appraisal. If the loan amount is 80% or less of the new appraised value, you can avoid having PMI tacked onto your refinance loan.

Keep in mind that refinancing will trigger a host of fees and closing costs. Refinancing typically makes the most sense if interest rates have fallen since you took out the original mortgage.

4. Get a new appraisal

If home values have gone up in your area or you’ve made a lot of improvements to your home, you could have more than 20% equity based on the home’s current value. Providing the loan-to-value ratio with a new appraisal value meets the lender’s requirements, you may be able to get PMI taken off. Check with your lender to understand its policies for this process.

Can PMI be removed if my home value increases?

Over time, homes typically appreciate in value. And if you make improvements to the property, the value can go up even further. As long as you meet your lender’s requirements, a new appraisal of the property could help you get rid of PMI.

Note that the Homeowners Protection Act doesn’t require that you hold onto your loan for a certain length of time before you can request PMI cancellation. The same holds true when it comes to eligibility for automatic PMI termination, which is known as a seasoning requirement.

Is removing PMI worth it?

In many cases, getting rid of PMI can be worth it because it translates directly to monthly savings. Depending on your situation, though, it’s important to keep potential costs in mind.

If you’re planning to refinance, for instance, closing costs can range from 2% to 6% of the loan amount. If the savings you generate from refinancing (including PMI savings) make up for these upfront costs before you plan to sell the home, it can be worth it.

If you think you might be close to having PMI removed based on your current home value, you’ll need to pay for an appraisal, which can cost between $313 and $422 for a single-family home, according to HomeAdvisor.

If you end up qualifying for PMI cancellation, that upfront cost can be worth it. But if the appraised value comes up short, you’re out the cost of the appraisal with nothing to show for it.

What’s next?

If you believe you qualify for PMI cancellation, carefully consider your situation and which removal method is the right one for you. Start by calculating your current LTV, which can be done by dividing your mortgage balance by the original value of your home.

If the LTV is close to the 80% threshold, review your loan documents or contact your lender to get the amortization schedule and find out how close you are.

If you can’t get rid of PMI based on the original loan value, use an online property valuator like Redfin or Zillow to get an idea of what your home might be worth. If you feel confident that an appraisal could help you achieve your goal, that’s a smaller upfront investment than a refinance.

But if you’re also thinking about refinancing your home loan to take advantage of other benefits, getting rid of PMI may simply be the icing on the cake.