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Buying a home is one of the biggest purchases you can make — and if your down payment is less than 20%, you’ll be stuck paying private mortgage insurance (PMI).
PMI can add between $30 and $70 to your mortgage payment every month for each $100,000 borrowed. So, if you borrow $250,000, you could end up paying as much as $175 extra each month.
Here’s what you need to know about PMI:
What is private mortgage insurance (PMI)?
PMI is an additional insurance policy that you purchase on behalf of your mortgage lender. It’s usually required when you put down less than 20% on a home. That’s because, with only 20% equity in your new home, you pose more risk to the lender. PMI helps protect the lender in case you default on the loan.
Your monthly PMI premium will vary by lender, but you can expect to pay between $30 and $70 per month for every $100,000 borrowed on a conventional loan, according to Freddie Mac.
If you choose to finance your home with a government-backed loan, such as an FHA loan, you’ll pay similar fees. For instance, all FHA loans require a mortgage insurance premium (MIP), which serves the same purpose as PMI.
How long you’ll pay PMI depends on your initial loan-to-value (LTV) ratio — that is, how much you owe on your mortgage compared to the value of the property — and how much you pay toward your loan principal each month.
5 ways to get rid of PMI
You won’t have to pay PMI forever. In fact, you might have options for eliminating it right now. Here are a few.
1. Wait for automatic cancellation
Best if: You were unaware you could cancel PMI earlier and are about to reach 78% LTV.
As long as you’re up-to-date on your payments, lenders must automatically cancel your PMI when you reach 78% LTV on your home, based on its value when you took out the loan. If you’re behind on your payments and have reached 78% LTV, your PMI will terminate as soon as your account is in good standing.
It’s never in your best interest to wait for automatic termination, but if you didn’t realize you could cancel PMI before this point and will hit 78% LTV with your next payment — or, you’re about to reach the halfway mark in your loan term — you can let it terminate automatically.
Contact your lender to find out when, exactly, your PMI will be canceled automatically according to the amortization schedule.
2. Request PMI cancellation when your mortgage balance reaches 80%
Best if: You’ve accrued 20% equity in your home.
When you reach 80% LTV, you have a significant investment in your home and pose less risk to the lender. As a result, you can request PMI cancellation. You’ll need to make the request to your servicer in writing.
3. Pay down your loan
Best if: You have less than 20% equity but have enough cash to make up the difference.
If you have the resources, you can make a lump sum principal payment to get to 20% equity and request PMI cancellation from there.
Review your mortgage statement or contact your lender to find out how much you need to pay to get your mortgage to 80% LTV. If you can’t pay that amount all at once, break it up into a series of manageable principal-only payments.
Check Out: How to Lower Your Monthly Mortgage Payment: Guide
4. Get a new appraisal
Best if: You believe your home’s value has appreciated since you purchased it.
If your home has increased in value — whether it be from market conditions or improvements you’ve made — you might have an LTV of 80% (or less) even though your principal balance is below 20% of the purchase price.
The only way to know for sure is to get a home appraisal. If the valuation is high enough, the lender might be willing to cancel your PMI.
Here’s what you’ll need to do:
- Contact your lender to find out its procedure for canceling PMI based on appreciation.
- Ask the lender for a referral. This will ensure the lender accepts the appraiser’s opinion of value.
- Schedule the appraisal.
- Follow the lender’s instructions for submitting the appraisal report and requesting PMI cancellation.
In addition, your lender might require an LTV of 75% rather than the typical 80%, and it’ll want to see you have a good payment history.
5. Refinance your home loan
Best if: You can refinance at a lower rate with an LTV ratio of at least 80%.
Finally, if you can decrease your LTV to less than 80%, a mortgage refinance can help you get rid of PMI. In fact, depending on the situation with your FHA loan, refinancing might be your only option for how to get rid of PMI on an FHA loan.
Of course, you’ll likely have to pay closing costs on your refinance, so it’s important to run the numbers and consult with your mortgage representative before making a decision.
If the refinance lender’s appraisal shows that your home’s value has appreciated to the point where your LTV is now less than less than 80%, you won’t have to pay PMI. Otherwise, you’ll need to make a lump-sum payment on your current loan to bring your equity to at least 20% before refinancing.
In the end, refinancing your way out of PMI requires a lot of cash, but it might be worth it if you can save enough in interest.
Similarly, a favorable 15-year fixed refinance rate can save you even more on interest, even if it means having to make a higher monthly payment.
Learn More: When to Refinance a Mortgage
Lower your monthly costs
While paying PMI can allow you to buy a home with a lower down payment, it also costs you money. The sooner you can get rid of PMI, the better off you’ll be.
To lower your costs further, make sure to shop around for refinance rates. Credible lets you easily compare real, prequalified rates from all of our partner lenders in the table below.
Miranda Marquit contributed to the reporting of this article.