Understanding PMI Removal
Private Mortgage Insurance (PMI) is an additional cost that lenders require when you make a down payment of less than 20% on a conventional mortgage. The good news? PMI isn't permanent. Once you build enough equity in your home, you can remove it and save hundreds of dollars per month.
When Can You Remove PMI?
There are two key thresholds for PMI removal:
- 80% LTV (Request Removal): Once your loan-to-value ratio reaches 80%, you can contact your lender and request PMI removal. The lender may require a new appraisal to verify your home's current value.
- 78% LTV (Automatic Removal): By law, your lender must automatically cancel PMI when your loan balance reaches 78% of the original home value, as long as you're current on payments.
How to Calculate Loan-to-Value Ratio
The loan-to-value (LTV) ratio is calculated by dividing your current loan balance by your home's current value:
LTV = (Loan Balance ÷ Home Value) × 100Example: $240,000 loan balance ÷ $300,000 home value = 80% LTV
Ways to Reach 80% LTV Faster
- Make Extra Principal Payments: Even small additional payments can significantly accelerate your path to PMI removal. An extra $200/month could save years of PMI payments.
- Make a Lump Sum Payment: Got a bonus or tax refund? Applying it to your mortgage principal can help you reach 80% LTV much faster.
- Home Appreciation: As your home increases in value, your LTV ratio decreases even without making extra payments. In appreciating markets, this can work in your favor.
- Home Improvements: Strategic renovations that increase your home's value can help you reach the 80% threshold sooner. Be sure to get a new appraisal after improvements.
Steps to Request PMI Removal
- Verify Your LTV: Use this calculator to determine if you've reached 80% LTV based on your current loan balance and home value.
- Check Your Payment History: Ensure you have a good payment history with no late payments in the past 12 months.
- Contact Your Lender: Submit a written request to your mortgage servicer asking for PMI cancellation.
- Order an Appraisal (if required): Many lenders require a professional appraisal to verify your home's current value. This typically costs $300-$500.
- Get Written Confirmation: Once approved, obtain written confirmation that PMI has been removed from your loan.
PMI Removal Requirements
Lenders typically have specific requirements for PMI removal:
- Loan-to-value ratio of 80% or less
- Good payment history (no 30-day late payments in the past year)
- No second mortgages or liens on the property
- Current appraisal showing sufficient home value (if using appreciation)
- Minimum waiting period (usually 2 years for refinances)
FHA Loans and MIP
It's important to note that FHA loans have different rules. FHA mortgage insurance premiums (MIP) cannot be removed like conventional PMI unless you made a down payment of 10% or more (in which case MIP drops off after 11 years). For most FHA loans with less than 10% down, the only way to remove MIP is to refinance to a conventional loan once you reach 20% equity.
Tax Implications
PMI premiums were tax-deductible for some borrowers in previous years, but this deduction has expired and may not be available. However, removing PMI entirely eliminates this concern and saves you money regardless of tax treatment. Always consult with a tax professional about your specific situation.
How Much Can You Save?
The average PMI payment ranges from $30 to $70 per month for every $100,000 borrowed, depending on your credit score and down payment. For a $300,000 loan, that's $90 to $210 per month, or $1,080 to $2,520 per year. Over several years, PMI can cost tens of thousands of dollars. Removing it as soon as you're eligible puts that money back in your pocket.
Common Mistakes to Avoid
- Not Requesting Removal: PMI won't automatically come off at 80% LTV—you must request it. Many homeowners overpay PMI for years simply because they don't ask.
- Using the Wrong Home Value: Some lenders base PMI removal on the original purchase price rather than current market value. Understand your lender's policy.
- Ignoring the Appraisal Requirement: If your lender requires an appraisal, factor in the cost ($300-$500) when calculating your savings timeline.
- Missing the Automatic Removal: At 78% LTV, removal should be automatic. If it doesn't happen, follow up with your servicer immediately.
Frequently Asked Questions
Can I remove PMI without a new appraisal?
It depends on your lender's policy. If you're relying on your regular payment schedule to reach 80% LTV based on the original home value, most lenders won't require an appraisal. However, if you're using home appreciation or improvements to reach 80% LTV faster, an appraisal is typically required.
What if my home value decreased?
If your home has lost value, you'll need to rely on paying down your loan principal to reach the 80% LTV threshold. Focus on making extra principal payments to accelerate the process.
How long does PMI removal take?
Once you submit your request and meet all requirements, PMI removal typically takes 30-45 days. The timeline can be longer if an appraisal is required.
Will removing PMI lower my monthly payment?
Yes! Once PMI is removed, that portion of your payment goes away immediately, lowering your total monthly housing cost. Make sure to verify the change on your next mortgage statement.
Can I remove PMI if I refinance?
If you refinance and have at least 20% equity, you can eliminate PMI with the new loan. However, factor in refinance closing costs when determining if this strategy makes financial sense.
What's the difference between PMI and MIP?
PMI (Private Mortgage Insurance) is for conventional loans and can be removed once you reach 78-80% LTV. MIP (Mortgage Insurance Premium) is for FHA loans and typically remains for the life of the loan if you put down less than 10%, making it much harder to remove without refinancing.
Take Action Today
Use the calculator above to determine exactly when you can remove PMI and how much you'll save. If you're already at or near 80% LTV, contact your lender immediately to start the removal process. Every month you wait is money wasted on unnecessary insurance premiums.