Over the next several weeks we’ll be addressing some common mortgage questions we get as realtors. Today we’re starting off our mortgage series by talking about PMI – what it is, what it’s for, and how you can get rid of it.
What Is PMI?
Private Mortgage Insurance (PMI) is a type of insurance that protects your lender—not you—in case you stop making payments on your loan. It’s typically required when your down payment is less than 20% of the home’s purchase price.
PMI can cost anywhere from 0.3% to 1.5% of the original loan amount per year, depending on your loan details and credit score. That could mean hundreds of dollars per month added to your mortgage payment.
What Is PMI For?
PMI (Private Mortgage Insurance) is designed to protect the lender, not the borrower. When you buy a home with less than 20% down, the lender takes on more risk—because if you default on the loan, there’s less equity in the home to recover their money through a sale.
That’s where PMI comes in.
If you stop making payments and the lender has to foreclose, PMI helps cover the lender’s losses. It gives lenders the confidence to approve loans with smaller down payments, making it possible for more people to become homeowners sooner, rather than waiting to save up 20%.
When Can You Remove PMI?
There are a few paths to eliminate PMI, but they mostly revolve around reaching 20% equity in your home—the point at which your loan is 80% of your home’s value.
Here’s how you can remove PMI:
1. Request Removal at 80% Loan-to-Value (LTV)
Once your loan balance reaches 80% of the original home value, you can contact your lender in writing to request that PMI be canceled. You’ll likely need:
- A solid payment history
- No second mortgages or liens
- Proof that your home hasn’t dropped in value (sometimes an appraisal is required)
Example: If your home was worth $300,000 when you bought it, you can ask to remove PMI when your mortgage balance hits $240,000 (80%).
2. Automatic Cancellation at 78% LTV
If you don’t request removal, federal law requires lenders to automatically cancel PMI once your loan reaches 78% of the original value, as long as your payments are current.
3. Home Value Has Increased? Get a New Appraisal
If your home has gone up in value due to market appreciation or improvements you’ve made, you might reach 20% equity faster than you think. In this case, you can:
- Pay for a new appraisal
- Ask your lender to remove PMI based on the current appraised value, not just the original purchase price
Tip: This can be a great option in markets where home prices have risen quickly.
4. Refinance Your Mortgage
If rates have dropped or your credit score has improved, refinancing might both reduce your interest rate and eliminate PMI—especially if your new loan amount is 80% or less of the home’s value.
Just be sure to factor in closing costs to see if refinancing makes financial sense.
The Bottom Line
PMI isn’t permanent—and you shouldn’t be stuck paying it longer than necessary. Whether you’re approaching 20% equity, have made extra payments, or your home’s value has jumped, it’s worth checking in with your lender to see if you qualify to remove PMI.
Not sure where you stand or how to calculate your current equity? A local real estate professional or mortgage advisor can help you figure it out and walk you through your options.