Let’s face it: PMI is a pain in the butt.
Private mortgage insurance is required for most loans with a less than 20% down payment. Since lower down payment loans tend to be risky, lenders typically require a private mortgage insurance policy to reduce their exposure if the borrower defaults on their loan.
In other words, PMI is put in place to protect lenders, but you’re the one who pays for it.
Hold up … how much does PMI cost? And can you pay for it all upfront? We have more details.
The good news is that PMI won’t last forever. Here’s how it can go away:
Cancel it at 20% equity
Since PMI applies to buyers with less than 20% as a down payment, once you reach 20% equity, you can request that it be canceled.
In other words, provided you’re up-to-date on your mortgage payments and meet the conditions of your PMI policy, lenders will let you remove PMI once the amount you owe (known as “loan-to-value,” or LTV) falls to 80% or less of the original value of your home.
By “original value,” we mean the amount you paid for the home or its current appraised value, whichever is lower. If you refinance, the original value becomes the appraised value at the time of the refinancing.
How do you keep track of this? The “projected payments” section of your Closing Disclosure (your lender is required to provide this at least 3 days before closing) will show how long you’ll pay PMI. It may also include an amortization schedule, a detailed schedule of how your mortgage will be paid down month by month. When the outstanding loan balance (or “unpaid principal”) drops to 80% of the original value, you can cancel your PMI.
If you don’t have an amortization schedule, simply call up your lender and ask for one. If you hate making phone calls to big companies (we totally understand), there is a way to calculate a reasonably accurate LTV on your own. Just divide the “outstanding” or “unpaid” principal balance shown on your most recent statement by what you paid for your home. For example, if your outstanding principal is $160,000, and your property cost $200,000, your LTV is .80 or 80%.
Or it’ll be removed at 22%
It’s best to be proactive and get PMI out of your life as soon as possible. But if you miss the boat on that, lenders are required by law to automatically cancel PMI once your LTV gets to 78% — meaning you have 22% equity. PMI may stop when you get halfway through the amortization schedule for some loans, such as 15 years into a 30-year mortgage, even if you haven’t reached 22%.
What about MIP?
If you have a government-backed loan, like one from the Federal Housing Authority (FHA), then you may have a mortgage insurance premium (MIP).
If you put 10% as a down payment, your MIP will automatically go away after 11 years. If you put down less than that, you’ll need to refinance into a conventional loan to get rid of it.