Buying a home without giving your mortgage lender much down payment, if any at all, can allow you to buy a home now and begin building equity instead of waiting years to build enough savings for a 20% down payment.
Add in the cost of private mortgage insurance (PMI) that’s needed when less than a 20% down payment is made, and the monthly mortgage payment can be higher than it would be if you put 20% down.
If you don’t want to wait until you’ve saved that much, PMI can be worth paying. At least you have a home to live in and should be building equity in your new home.
But there’s nothing like getting rid of PMI payments. Homeowners can save up to $70 each month, depending on how big their loan is. The savings can be put toward extra payments on their home loan to lower the principal balance, or they can pocket the savings for a rainy day fund or anything else.
How to get out of PMI
There are four main ways to get out of paying PMI. The primary way is to reach 20% home equity. This can be done in a few ways but is usually done by paying off 20% of your mortgage, which means your loan balance is 80% of the home’s original value.
We’ll review the four main ways to no longer have to pay PMI, along with explanations on how to avoid it in the first place and some key terms to understand. We’ll also go over some pros and cons to getting rid of PMI.
Removing PMI from your mortgage should happen automatically through your lender once your home’s current value is 78% of its original value. But it’s a good idea to keep an eye on it yourself and ask that it be removed once you’ve reached that level. Higher home values in your neighborhood can be enough to push the value of your home into a higher equity level, for example.
What is PMI?
Private mortgage insurance, or PMI, is often required by lenders of homeowners who put less than 20% down. The insurance protects the lender if you’re unable to pay your mortgage.
It has nothing to do with regular homeowner’s insurance. That’s another extra cost homeowners pay to insure their home and its belongings against hazards and theft.
PMI is paid in a monthly fee that’s rolled into the mortgage payment. You pay it until your loan balance reaches 80% of the home’s original value.
Extra mortgage payments toward the principal balance can help you build equity faster and save on interest payments.
Why you needed PMI to begin with
A lender likely required you to have PMI because you didn’t have a 20% down payment. It’s insurance for the lender in case you don’t pay the mortgage or go into foreclosure.
PMI is used in “high-ratio” loans with a high loan-to-value ratio, or LTV, above 80%. The insurance allows the lender to recover costs from the resale of foreclosed property and other related expenses such as taxes or insurance policies that are paid before resale.
You may have chosen not to make a big down payment for a few reasons, such as wanting to buy a house now instead of waiting years to come up with a 20% down payment while home prices continued rising.
Or maybe you could never see yourself saving 20% and instead could only come up with 3% down or possibly no down payment at all.
Freddie Mac, which is a government entity that is one of the biggest buyers of home mortgages in the U.S., points out that for a $200,000 home, coming up with $30,000 more for a down payment of 20% makes the monthly payment about $200 cheaper than a 5% down payment. Over the life of the loan, you can save thousands of dollars.
$200,000 home: 5% down vs. 20% down
|5% down||20% down|
|Mortgage type||30-year fixed||30-year fixed|
|Monthly mortgage payment: principal + interest||$962.70||$810.70|
|Total monthly payment||$1,043.45||$810.70|
PMI for the higher loan amount can be removed with 20% equity being reached, but the lower down payment still means paying more in principal and interest each month.
Loans that don’t need PMI
Not every home loan with less than 20% down requires buying PMI. It’s often required for a conventional mortgage, but sometimes not for others. Here are some:
Lender-Paid Mortgage Insurance
Lender-Paid Mortgage Insurance (LPMI) is when the lender pays PMI instead of you. The catch is that you pay a higher interest rate on the loan while putting as little as 3% down.
You can never cancel LPMI, even if you pay more than 20% of your home’s value. If you’re going to be in your home for a long time, this is an extra cost you won’t be able to avoid.
If you can come up with a 10% down payment, a second mortgage that’s called a piggyback loan pays the other 10% so that your first mortgage is for 80% of the purchase price. The piggyback loan can be a home equity loan, for example.
You’re meeting the 20% down rule to avoid PMI, but with two loans instead of one. The piggyback loan is for only 10% of the home’s cost, so you should be able to pay it off early so you can get to 20% equity on your own.
Low down-payment programs
Many banks and other lenders offer 3% down loans that don’t require PMI. These home loans are often aimed at first-time homebuyers, low-income buyers, or certain professionals such as teachers and doctors.
Veterans and service members can avoid paying PMI through a VA loan, which requires no down payment as part of the loan term.
A one-time “funding fee” of 1.4% to 3.6% of the loan amount is required, but it’s usually cheaper than buying mortgage insurance.
Federal Housing Administration loans are tailored to first-time homebuyers with low credit scores and require only a 3.5% down payment.
An FHA loan doesn’t require PMI, but it does require something similar, called mortgage insurance premium (MIP). Unfortunately, MIP can’t be canceled, and it won’t be removed automatically unless the homeowner bought with more than 10% down and paid MIP for 11 years.
One way out is to refinance your FHA loan into a conventional loan when your mortgage reaches an 80% loan-to-value ratio.
4 ways to get out of PMI
Getting a loan without putting 20% down is possible, especially if you’re a first-time homebuyer. If you don’t need PMI, then you’re set. But if you’ve put less than 20% down on a conventional mortgage, then chances are the lender will require PMI.
Here are four ways to end PMI payments and not have to make monthly payments anymore:
The Homeowners Protection Act (HPA) requires the mortgage lender or servicer to remove PMI when the mortgage balance reaches 78% of the original purchase price or the loan is halfway through the amortization schedule.
To be eligible, homeowners must be up to date on their mortgage payments.
If you’ve been paying off the loan balance on a 30-year loan for 15 years, the lender must cancel PMI even if the mortgage balance hasn’t reached 78% of the home’s original value. This is called final termination.
If your balance reaches 78% of the purchase price, then the lender often does automatic termination of PMI without the borrower having to do anything.
Request cancellation at 80%
You don’t have to wait for automatic cancellation. If your loan balance reaches 80% of the home’s original value, you can ask the servicer to cancel PMI payments.
The PMI disclosure form from your loan servicer will list the date when your home’s value gets to 80%, provided you’ve made all of the payments as scheduled.
You can get to 20% equity faster by making extra payments on the principal balance. To estimate how much your mortgage balance needs to be eligible to cancel PMI, multiply the original home purchase price by 0.80.
Like the first option, you must be current on your mortgage payments. The cancellation request should be in writing. There should be no liens on the home, and a home appraisal may be required.
When mortgage rates are low, it can be worth looking into refinancing for many reasons.
Refinancing a home loan into a new loan with a lower interest rate not only lowers your monthly mortgage payments but may allow you to cancel PMI if the new mortgage balance is below 80% of the original purchase price.
If your home has gained a lot of value since you bought it, the higher value can be factored into the amount of equity you have in the house when you refinance the loan. For example, if you put down 5% and the home’s value has risen 15% since then, you now owe less than 80% of the house is worth.
This option doesn’t usually work for new homeowners, even if their homes have soared in value. Many loans require waiting at least two years before refinancing can be done to get rid of PMI.
Reappraise your home’s value
Instead of refinancing, a more straightforward way to get rid of PMI if the value of your home is much higher than its original value is to pay for a new appraisal. If you see the property value of similar homes in your area selling for 20% or more than your loan balance, then an appraisal can be used to request PMI cancellation.
Most home appraisals cost $200-$600, with the national average at around $335, according to Home Advisor.
Home improvements that you’ve made while living there can also increase a home’s appraised price. These include adding an extra room or pool or kitchen upgrades.
Mortgage Payoff Calculator
According to Freddie Mac, PMI costs $30 to $70 per month for every $100,000 borrowed. For a $200,000 home loan, that’s up to $1,680 per year a homeowner would pay for insurance.
The benefit of paying it is that it can allow you to buy a home with a much smaller down payment than the 20% down that some lenders require for a conventional mortgage. You can start building equity in your home immediately instead of waiting years to save for a 20% down payment.
In markets where home prices are soaring quickly, you may not want to wait to buy a home and start building equity.
Getting rid of PMI is relatively easy if your equity has reached 78% of the original purchase price. The lender will drop PMI automatically, or you can request it.
But if you refinance your home loan or reappraise its value to reach 80% of the home’s original value, some extra costs will be charged.
Refinancing a home loan generally costs 2-5% of the loan principal in closing costs. For a $200,000 mortgage refi, closing costs can add up to $4,000 to $10,000, according to ClosingCorp.
Getting a new appraisal of your home costs an average of $335 nationally.
- Cancelling PMI can save you up to $70 per month for insurance that mainly benefits the lender.
- In soaring real estate markets, home values can rise quickly and make getting rid of PMI easier when the home’s new appraised value reaches 80% of the home's original cost. However, many lenders require new homeowners to wait at least two years before dropping PMI.
- Buying PMI isn’t all bad. It allows borrowers to put less money down on a home, leaving more money in their budget for other home-related expenses.
- It can take years to reach 20% equity in a home when PMI can often be canceled.
- Using your savings or retirement funds to achieve 20% equity can hurt your overall financial wellness, so check with your financial advisor before moving such funds.
- A home reappraisal or new mortgage through a refi costs around $300 to a few thousand dollars, which can eat up a few months or years of savings by getting rid of PMI.
The bottom line
If you bought your home with a low down payment and had to buy PMI from your lender, you should be able to quickly get out of paying it any longer when you have 20% equity in your home.
To put it another way, if your home’s loan balance is 80% of the original purchase price, including through your loan payments or soaring home prices, then you should be able to cancel PMI.
Sometimes cancellation will be automatic, and other times you’ll need to request it. Or you may want to refinance your home loan into a loan at a lower interest rate or get your home reappraised. All can lead to getting rid of PMI.
And in the world of homeownership, having one less bill to pay each month is a big step in the right direction of eventually owning your home outright.