Goodbye PMI: Canceling Private Mortgage Insurance

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Jul 05, 2023

Goodbye PMI: Canceling Private Mortgage Insurance

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Buying a home is a significant achievement, but if you made a down payment of less than 20%, you may be familiar with the burden of Private Mortgage Insurance (PMI).

While PMI is a useful tool that allows homebuyers to secure a mortgage with a lower down payment, it's understandable that many homeowners strive to cancel it as soon as possible. Fortunately, there are pathways to bid farewell to PMI and potentially save hundreds of dollars each month.

In this article

What is PMI?

Private Mortgage Insurance (PMI) is a type of insurance that protects lenders in the event a borrower defaults on their mortgage loan. Lenders typically require it when a borrower makes a down payment of less than 20% of the home's purchase price.

PMI aims to mitigate the risk for lenders by protecting them against potential losses. If the borrower defaults on the loan and the home goes into foreclosure, the PMI policy reimburses the lender for a portion of the outstanding mortgage balance.

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How to cancel PMI

To cancel your private mortgage insurance (PMI), these are the general steps you can take to cancel PMI:

Review your mortgage loan documents

Carefully review your mortgage loan agreement, including the terms and conditions related to PMI. It should specify the criteria for PMI cancellation, such as the loan-to-value (LTV) ratio or the number of years of on-time mortgage payments required.

Determine your current home equity

Calculate your current home equity by dividing the outstanding loan balance by the current appraised value of your home.

Equity = Market Value - Mortgage Balance

For example, if your home's market value is $300,000 and your outstanding mortgage balance is $200,000, your equity would be $100,000.

If your LTV ratio is at or below 80%, you may be eligible to cancel PMI.

Confirm payment history

Ensure you have a good payment history by making all your mortgage payments on time. Lenders usually require a consistent payment record without any late payments or delinquencies.

Contact your lender

Contact your lender and inquire about their specific PMI cancellation process. They will provide the necessary information, forms, and requirements to initiate the cancellation.

Obtain a new appraisal

In some cases, your lender may require a new appraisal to determine the current value of your home. You might need to cover the cost of the appraisal. If the new appraisal shows that your LTV ratio is below 80%, it strengthens your case for PMI cancellation.

Submit a cancellation request

Complete the required forms provided by your lender and submit a formal request for PMI cancellation. Include any supporting documentation, such as the appraisal report, to demonstrate that you meet the necessary criteria.

Follow up with your lender

Stay in communication with your lender to ensure that your request is being processed. They may have specific timelines or additional requirements that you need to fulfill.

How much can you save after canceling PMI?

The cost of private mortgage insurance (PMI) can vary depending on several factors, including the loan amount, down payment, borrower's credit score, and the specific terms of the PMI policy. On average, PMI typically ranges from 0.5% to 1% of the loan amount per year.

The amount you can save each month by canceling private mortgage insurance (PMI) depends on the specific terms of your PMI policy, your outstanding loan balance, and the cost of your PMI premium.

Once you know your monthly PMI premium, you can calculate your potential savings by subtracting the PMI premium from your total monthly mortgage payment. For example, if your monthly mortgage payment is $1,500 and your PMI premium is $100, your potential savings would be $1,400 ($1,500 - $100).

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The bottom line

Cancelling PMI can be a significant financial milestone for homeowners. By reaching the required equity threshold, diligently following the lender's guidelines, and submitting the necessary documentation, you can free yourself from the burden of PMI premiums. This will reduce your monthly mortgage payment and give you the freedom to allocate those funds toward other financial goals or enjoy a higher disposable income.

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