How to Get Rid of Mortgage Insurance

Article Summary:

Mortgage insurance typically costs between 0.25% and 2% of your mortgage amount per year. You can save thousands of dollars if you learn how to get rid of mortgage insurance. There are four ways you can get rid of mortgage insurance, three involve waiting and the fourth you might be able to do today.

You probably had to get private mortgage insurance (PMI) on your conventional loan because you bought a home with a down payment of less than 20% of the purchase price. Or maybe you got an FHA loan and have to pay mortgage insurance premiums. Now you want out. And who can blame you? Mortgage insurance can cost you thousands of dollars and provides no value to the borrower. The good news is you don’t need to pay for it forever.

In this article, we will discuss four ways you can get rid of mortgage insurance. Let’s get started:

What is private mortgage insurance (PMI)?

Private mortgage insurance is a form of mortgage insurance some lenders require if you get a conventional loan and don’t provide a sufficiently large down payment. PMI may also be required if you refinance a conventional loan and your equity is less than 20% of the value of your home.

It’s important to note that PMI protects the lender—not you—if you stop making payments on your mortgage. So, it is smart to try and get rid of your mortgage insurance as soon as you can. Here are four ways you can do it.

The average mortgage with a PMI is for $290K. Mortgage insurance typically ranges from 0.5% to 1% of the loan amount. That’s $1,450 to $2,900 a year.

4 Ways to get rid of mortgage insurance

There may be four ways to get rid of mortgage insurance, but they all revolve around two main factors: your loan-to-value ratio (LTV) and the type of mortgage you have (e.g., FHA, conventional). It’s important to understand how they are related to your mortgage insurance.

  • Loan-to-value ratio (LTV). Your LTV measures how much equity you have in your home. Calculate your loan-to-value ratio by dividing your current loan balance by the original value of your property. Then multiply by 100. So if you put 10% down on a $300,000 property, your initial loan balance would be $270,000 and your LTV would be 90%. As you make monthly payments, your LTV will drop. Generally, your LTV needs to be 80% or lower before you can get rid of your mortgage insurance.
  • Mortgage type.  Rules are different for FHA mortgages. If your down payment was less than 10% you will need to pay a mortgage insurance premium (FHA’s version of PMI) for the life of the mortgage. If your down payment was 10% or higher, then you will pay a mortgage insurance premium for 11 years.

Now we have those definitions under our belt, let’s see how you can stop paying mortgage insurance.

1. Refinance your mortgage

If mortgage rates have dropped, your credit score has improved, or the value of your home has increased, you could save a lot of money by refinancing your mortgage for one with lower rates and no PMI. Some lenders offer mortgages without PMI — or to be more accurate lender-paid mortgage insurance. However, they usually carry a higher interest rate. So, compare mortgages carefully before you refinance.

Here is a list of the best mortgage refinance lenders currently available.

Refinancing can be particularly advantageous when you have an FHA loan. Remember that with FHA loans you are stuck with mortgage insurance for the life of the mortgage unless you put a 10% or higher down payment. And even then it’s a minimum of 11 years.

It doesn’t matter what the home’s current value might be if you put down less than 10% initially on an FHA loan; you’re stuck unless you refinance into a conventional mortgage. However, there are a lot of benefits to using an FHA loan. It’s just that eliminating mortgage insurance is not one of them.

2. Request a PMI cancellation when you hit 20% equity

You can request your lender to remove the PMI whenever the loan hits a loan to value ratio of 80%. However, you will have to meet the lender’s criteria (e.g., no missed payments, the market price hasn’t dropped considerably, etc.) Note that reaching 20% equity could happen faster than you expect if home values in your area have gone up or if you have made substantial improvements to your home. Depending on the loan type and lender, you could have the PMI removed by just reappraising the home.

It’s important to note that some lenders will go by the home’s initial price, and others will go by the market value when calculating loan-to-value. If your lender will not consider the current value when calculating your loan-to-value ratio, consider getting a mortgage refinance.

3. Wait till you build 22% equity

Typically lenders will automatically remove the PMI once the loan to value ratio of your home reaches 78% of the home value. Remember the lender will usually go by the home’s initial purchase price. You may ask what happens if your home declines in value. If your home has dropped in value, your mortgage servicer may require reevaluating the home’s price before canceling your PMI.

4. Wait till your mortgage hits the midpoint period on your loan

Your lender will automatically terminate PMI when your loan reaches the midpoint period on your loan. For example, if you have been paying your 30-year mortgage for 15 years, and you still don’t have an 80% loan to value ratio, your lender should remove your mortgage insurance.

The Federal Homeowner’s Protection act requires lenders to eliminate the PMI once the homeowner makes monthly payments on 50% of the loan term. It is only really applies to conventional mortgages that start with an interest-only payment and have a balloon payment at the end of the period.

Mortgage insurance premium vs private mortgage insurance

Mortgage insurance premium (MIP) is practically the same as private mortgage insurance but it is paid by homeowners who take out loans backed by the Federal Housing Administration (FHA).

According to HUD, FHA had active insurance on more than 7.8 million single-family mortgages in 2021 (a balance of more than $1.2 trillion). The percentage of first-time homebuyers using FHA insurance reached a new high in 2021 of 84.61 percent of total FHA mortgages in 2021.

FHA-backed lenders use the money collected by these premiums to compensate for the risk of lending to borrowers who are more likely to default on loans. In the case of FHA mortgages, everyone is required to pay a mortgage insurance premium. However, you can request your FHA-lender to remove the MIP if you meet certain requirements.

How much does mortgage insurance cost?

The cost of mortgage insurance varies depending on your credit, loan amount, and type of mortgage. Conventional mortgages charge private mortgage insurance that ranges from 0.5% to 2% of the loan amount but typically hovers around 1%.

To illustrate, the average mortgage with a PMI is for $290K. Mortgage insurance typically ranges from 0.5% to 1% of the loan amount. That’s $1,450 to $2,900 a year.

FHA loans have an upfront mortgage insurance premium of 1.75% of the loan amount. Then there is an annual mortgage insurance premium that ranges from 0.45% to 1.05% depending on the loan amount, the size of the down payment, and the mortgage term. For example, in a $290K mortgage with a 10% down payment, a borrower would have to pay 0.80% of the loan amount, or $2,320.

Mortgage insurance statistics

Homebuyers that pay PMI tend to have lower credit scores and higher LTV and DTI ratios than homeowners with conventional loans that don’t.

In 2020, 22.4% of conventional loans had PMI. The share of PMI mortgages was higher for purchase loans (50.8%) than for refinancing mortgages (10.7%). The average balance of a PMI mortgage is about 2% larger than that of non-PMI mortgages.

Percentage Avg. Loan $ thousands LTV  (%) Average FICO DTI  (%)
2015 26.9% 73% $223.2 $221.8 92.7% 66.8% 741 750 34.6% 33.2%
2016 26.3% 73.6% $233.9 $233 92.3% 66.1% 742 751 34.8% 33.1%
2017 30% 70% $236 $225.6 92.7% 67.2% 740 745 36% 34.6%
2018 34.4% 65.6% $243.6 $227.9 92.9% 67.4% 740 744 37.6% 35.9%
2019 32.4% 67.6% $268.6 $256.4 92.4% 67.1% 745 751 36.6% 34.7%
2020 22.4% 77.5% $289.7 $283.8 91.3% 64.2% 749 762 35.3% 32.6%

However, the average value of PMI homes was considerably lower. The average home with a PMI-mortgage had a value of $317,326, but homes financed with non-PMI mortgages had an average value of $441,844. As you would expect, PMI borrowers have higher loan-to-value ratios (91.3% vs. 64.2%).

What percentage of mortgages have mortgage insurance?

In 2020, 22.4% of GSE mortgages (mortgages backed by government-sponsored enterprises) had private mortgage insurance. However, 40.7% of agency mortgages had some kind of mortgage insurance (PMI, FHA, or VA).

Things change a little when you look exclusively at conventional mortgages. From 1999 to 2020, 62.9% of mortgages originated were conventional loans without PMI, 15.2% were conventional loans with PMI, 13.1 percent were FHA loans, and 4.8% were VA loans, according to Black Knight data, which include agency issuance plus bank portfolio loans and some private-label securities. (source).

What types of mortgage insurance are more common?

About 42% of homes with mortgage insurance had PMI coverage, 28% were FHA insured, and 30% were VA insured. The market share of PMI has gradually increased since 2016, while the FHA and VA share has declined.

PMI rights under federal law

The federal Homeowners Protection Act (HPA) requires that lenders cancel the PMI payment in the following scenarios.

  1. Removal of PMI by request
  2. Automatic removal of PMI when the borrower hits LTV of 78%
  3. After the borrower has reached the midpoint term of the mortgage to cancel the MPI automatically.

As mentioned above, the lender will terminate PMI payments when the borrower requests PMI removal or when the home reaches 78% of the loan to value ratio and when the borrower reaches the midterm period of the loan.

It’s important to note that the loan to value ratio is generally calculated based on either the purchase price or the appraised value at the point of the sale, whichever is lower. If the borrower wishes to have his PMI removed, he must reach out to his lender once the home value reaches 80% on the loan value.

It’s important to point out that certain firms such as Fannie Mae and Freddie Mac might have certain previsions that supersede HPA guidelines concerning PMI.

Things you should know about mortgage insurance

Many homeowners are not aware of the significant cost associated with PMI. PMI rates vary from as low as 0.5% to 1% of the total mortgage balance. When you consider this, you are adding a substantial cost to the mortgage. PMI payments don’t decrease. And unlike regular mortgage payments, they don’t help build up equity. The money you pay toward PMI doesn’t help you one bit. It is purely to protect the lender’s investment. When purchasing a new home, consider the added cost of PMI.

Ask your lender about non–PMI programs

Some lenders offer non-PMI programs, which usually carry a higher interest rate. I would recommend contacting your lender and asking them if they provide any non-PMI programs. Note that these programs may have higher rates so do the math and confirm you will benefit from the change.

How much a no–PMI refinance can save you

If you’re looking to save money as a borrower, a no-PMI refinance might be a good choice. The amount you will save depends on your current loan amount, how much you’re paying on PMI, the cost of refinancing the loan, and your loan term.

To illustrate, let’s say you’re paying $200 a month in PMI and you can refinance your loan and get rid of the PMI payment, but the loan’s closing costs are $4800. It would take you two years to break even on eliminating the PMI.

Depending on your loan terms, this may or may not be worth your while. If you plan to sell the home in a few years, or you plan to pay off the mortgage soon, then this strategy might not make sense for you. As a borrower, I recommend that you consult with your financial advisor before making any significant financial decisions.

What to consider before refinancing

When considering a mortgage refinance you should weigh the benefits (i.e., lower interest rates and no PMI) against the cost of refinancing. You also need to determine whether you will qualify for lower rates. If the only benefit you will get is not having to pay for private mortgage insurance, it might not make sense to refinance. Ask yourself, “besides canceling PMI, am I looking to do a cash-out refinance, or is the only reason for refinancing the loan for canceling PMI?”

PMI termination should not be your only consideration. It’s important to consider interest rates also and determine whether the savings justify the closing costs.

Conventional loans

Conventional mortgages (also known as conventional loans) are mortgages that are not backed by a government program, such as an FHA loan or a VA loan. A conventional loan usually requires a higher down payment than an FHA or a VA loan.

For a conventional loan, the typical down payment starts at 5%. In the case of FHA mortgages, you may need as little as 3.5%. Some VA loans don’t require a down payment at all. Conventional loans do not have an upfront PMI requirement. FHA loans, on the other hand, require an upfront payment of 1.75% of the loan amount as well as monthly premiums.

FHA loans

Federal Housing Administration (FHA) loans are government-backed and insured loans. FHA loans have more lenient eligibility guidelines that make homeownership more affordable.

FHA loans are typically marketed as mortgages for first-time homeowners, but this is not always the case. It doesn’t have to be your first home to qualify for an FHA loan. It just needs to be your primary residence. There are a few other requirements, but it mostly boils down to living in the home as opposed to flipping it or renting it out.

of total FHA mortgages have mortgage insurance

FHA is more affordable, offering a lower down payment than conventional loans. The other thing is that FHA loans allow you to roll the closing costs into the loan. FHA also allows borrowers with credit scores as low as 500 if you make a 10% down payment (580 with a 3.5% down payment) Conventional loans typically require a minimum credit score of 620.

Is PMI bad?

The private mortgage insurance (PMI) industry helps people who can’t afford a 20% down payment on a conventional mortgage buy a home. So you could argue it’s a good thing. But once you have the mortgage, paying for PMI is not helping you.

However, in some cases paying for PMI is a choice. For example, some homeowners may prefer to invest their savings in the stock market than pay a large down payment. This can be a smart move if your investments generate more income than the cost of PMI.

Nevertheless, do the math before you assume paying the PMI is worth avoiding a larger down payment. The typical PMI ranges from 0.5% to 1% of the entire loan amount. It’s even higher with FHA loans. If you have a substantial mortgage, say $500K, and a 1% PMI, you would have to pay $5K a year in mortgage insurance. Assuming you put a 5% down payment and invested $75K (instead of putting down the full 20%), you would need an annual return of at least 6.7% to justify paying the PMI in this scenario.

Frequently asked questions about PMI

Is there a way out of mortgage insurance?

There are several ways of getting out of mortgage insurance. These include hitting a loan to value ratio of 80% and refinancing for a no-PMI mortgage.

Can I cancel my mortgage insurance?

Yes, you can usually cancel your mortgage insurance. However, it may require making a lump sum payment, reappraising your home, or refinancing your mortgage. Make sure the savings you get for removing your PMI justify the costs.

How hard is it to get mortgage insurance removed?

The process is simple and highly regulated for conventional loans but it’s not as simple for FHA loans. If you have a traditional loan, you will need to submit a letter in writing to your lender. The lender will typically require a good payment history and no outstanding liens on the home.

For an FHA loan, the mortgage insurance gets removed automatically if the borrower’s down payment was greater than 10%, but will be removed only after 11 years.

For borrowers who put down less than 10%, the mortgage insurance remains with the loan for the life of the loan. The only way to get out of the mortgage insurance is to refinance into a conventional loan.

How do you calculate if the PMI can be removed?

You need to estimate the loan to value ratio. In other words, when you purchase the home, the amount you borrow is based on the purchase price or the official appraised value, whichever is lower.

For example, if a home is sold for 520k but got appraised at 500k. Once the homeowner owns 20% of the home’s value which would be 20% of 500k, so when the loan balance drops to 400k, the borrower could request having his PMI removed.

Do USDA or VA loans require PMI?

Not exactly, but they do have similar fees. For VA loans, there is something called Veteran’s Mortgage Life Insurance (VMLI). USDA loans have an upfront guarantee fee, which equals 1% of the total loan amount. There is also an annual fee that equals 0.35 of the loan amounts. For USDA loans, these fees are appliable regardless of the down payment amount.

Does a second mortgage also require PMI?

The second mortgage doesn’t require paying PMI if the first mortgage was up to 80% of the initial home value. There is a benefit to having a second mortgage; this does reduce the need for PMI; however, a second mortgage has a higher interest rate. So, the cost of higher interest rates will probably offset the savings you get from not having PMI.

Key Takeaways 

  • Mortgage insurance typically costs between 0.5% and 1% of a mortgage’s loan amount per year.
  • You can save thousands of dollars if you learn how to get rid of mortgage insurance.
  • Unlike conventional loans, FHA mortgage insurance does not get eliminated based on the loan to value ratio of your home.
  • You can get rid of mortgage insurance by waiting until you have 20% equity (it happens automatically when you hit 22%), waiting until you hit the mid-point of the mortgage term (15 years in a 30-year mortgage), or by refinancing your mortgage.
  • Consider the cost of PMI when comparing mortgages. It’s also a good idea to find out about the PMI removal policy of lenders before you choose a loan.
View Article Sources
  1. Consumer Finance Protection Bureau – What is PMI?
  2. Housing and Urban Development guidelines – MIP guidelines
  3. Consumer Finance Protection Bureau– Mortgage insurance guide
  4. HUD – FHA Financial Report to Congress
  5. Urban – Mortgage insurance report