Keep in mind: The Homeowners Protection Act of 1998 dictates that your mortgage lender or servicer must automatically terminate PMI when your loan-to-value (LTV) ratio drops to 78 percent — in other words, when your mortgage balance equals 78 percent of the purchase price of your house.
If you've owned the home for at least five years, and your loan balance is no more than 80 percent of the new valuation, you can ask for PMI cancellation. If you've owned the home for at least two years, your remaining mortgage balance must be no greater than 75 percent.
Even if you don't ask your servicer to cancel PMI, in general, your servicer must automatically terminate PMI on the date when your principal balance is scheduled to reach 78 percent of the original value of your home.
Ask to cancel your PMI: If your loan has met certain conditions and your loan to original value (LTOV) ratio falls below 80%, you may submit a written request to have your mortgage servicer cancel your PMI. For more information about canceling your PMI, contact your mortgage servicer.
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.
As a general rule, you can get PMI removed once you have 20% equity in your home. This equity can be a combination of the payments you've made and how much the house has gone up in value.
You can remove PMI from your monthly payment after your home reaches 20% in equity, either by requesting its cancellation or refinancing the loan.
You can typically request PMI be removed once you've reached 20% equity in your home in many cases as long as the value is verified. You will also need to be current on your payments.
Simply put: if you have an FHA loan term of more than 15 years, have been paying it for at least 5 years, and have an LTV ratio of 78% or less, PMI can be removed from the loan. FHA loans of 15 years or less have the same criteria, minus the 5-year requirement.
The Bottom Line. PMI is expensive. Unless you think you can get 20% equity in the home within a couple of years, it probably makes sense to wait until you can make a larger down payment or consider a less expensive home, which will make a 20% down payment more affordable.
The higher your LTV ratio, the higher your PMI payment. Your credit score: Your credit history and corresponding credit score play a major role in the cost of PMI. For example (using the Urban Institute figures), say someone is buying a $300,000 property with a 3.5 percent down payment.
Most lenders require that your LTV ratio be 80% or lower before they will cancel your PMI. Note: Some lenders express the percentage in reverse, requiring at least 20% equity in the property, for example.
The loan has not been more than 60+ days past due in mortgage payments within the last two years or 30+ days past due within the last year. There has not been a property value decline based on the actual sales price or original appraised value.
An appraisal that is higher than the purchase price puts you further down the path of paying off your PMI. It adds equity to your newly purchased home and reduces the shortfall in your less than 20% deposit. Consequently, the amount of PMI you need will be lower.
When PMI is canceled, the lender has 45 days to refund applicable premiums. That said, do you get PMI back when you sell your house? It's a reasonable question considering the new borrower is on the hook for mortgage insurance moving forward. Unfortunately for you, the seller, the premiums you paid won't be refunded.
Loans with shorter terms and larger down payments build equity significantly faster than loans with longer terms. Generally speaking, if you have a good credit score and make your monthly payments on time, you should be able to build sizable equity in your home over the course of five to 10 years.
After you've bought the home, you can typically request to stop paying PMI once you've reached 20% equity in your home. PMI is often canceled automatically once you've reached 22% equity. PMI only applies to conventional loans. Other types of loans often include their own types of mortgage insurance.
It's charged in a lump sum equal to 1.75% of your loan amount. It's typically financed (added) to your mortgage amount. It can be paid in cash, as the long as the amount is paid in full (partial cash payments aren't allowed) It isn't refundable unless you replace your current FHA loan with a new FHA loan.
Refinancing to get rid of PMI can cut your mortgage costs by a large margin and save you money for months or years to come. In addition to dropping mortgage insurance, you could potentially lower your rate and save on interest over the life of the loan.
PMI isn't forever
If you're current on your mortgage payments, PMI will automatically terminate on the date when your principal balance is scheduled to reach 78% of the original appraised value of your home. If you choose to use PMI, be sure to talk with your lender about these specific details of your policy.
This means that from the start of your purchase, you have 20 percent equity in the home's value. The formula to see equity is your home's worth ($200,000) minus your down payment (20 percent of $200,000 which is $40,000). You only own $40,000 of your home.
But in general, the cost of private mortgage insurance, or PMI, is about 0.5 to 1.5% of the loan amount per year. This annual premium is broken into monthly installments, which are added to your monthly mortgage payment. So a $300,000 loan would cost around $1,500 to $4,500 annually — or $125 to $375 per month.
There are two ways for a borrower to request cancelation of PMI: a) based on the original value of your home or b) based on its current value. If you meet the qualifications for either of these methods, your mortgage servicer has to cancel your PMI upon request.
In a purchase transaction, a higher appraised value doesn't have much of an impact. When evaluating a loan application, lenders will use the lower of the appraised value or sales price.