PMI: How to Avoid it or Remove it

What is PMI?

PMI stands for Private Mortgage Insurance. If you buy a house and make a down payment of less than 20 percent, the lender often requires you to pay for PMI. PMI protects the lender if you default on the loan. Why 20%? A bank can recover about 80% of a home’s value at a foreclosure auction if the buyer defaults and the bank has to seize the house.

How can you avoid PMI?

Simply, you have to put down at least 20% down when purchasing a house. So, for a $200,000 house, you will need to put down $40,000 to avoid PMI. Side note - Be sure to also account for closing costs, and have a 3-6 month emergency fund in a separate savings account before you buy.

How can you remove PMI?

  1. Wait for automatic cancellation. 

    • The Federal Homeowners Protection Act of 1998 requires lenders to terminate PMI, free of charge, at a loan to value ratio (LTV) of 78%.

    • Also, regardless of LTV, when your mortgage is halfway finished, your lender will automatically terminate your loan (Ex. Year 15 of 30)

  2. Request an early cancellation.

    • Your PMI can be canceled, when you reach 20% equity in your home based on the original property value, if your mortgage payments are current.

    • To make the case for cancellation, write a formal written request to your lender that includes but is not limited to; your solid payment history, proof of house value and documentation that there are no liens on the house.

  3. Pay for a new appraisal

    • If you think that your property has risen in value, and thus crossing the 80/20 threshold mortgage brokers are looking for, you can request early cancellation based on the home’s current value. However, it’s up to you to pay for the new appraisal and ask the bank to end PMI early.

    • One caveat: To cancel based on current value, you must have owned the home for at least two years and have 75% LTV. If you’ve owned the home for at least five years, you can cancel at 80% LTV.

Ray Robertson