Private mortgage insurance, commonly called PMI, can be an important part of getting a conventional mortgage when you do not have a large enough down payment.
While PMI can help borrowers qualify for a mortgage with a smaller down payment, it also adds to the cost of homeownership.
One common question borrowers have after purchasing a home is: When can you remove PMI?
The answer depends on factors such as your loan type, original property value, current loan balance, payment history, and applicable mortgage insurance rules.
Understanding how PMI works can help homeowners determine when they may be able to stop paying it.
What Is PMI?
Private mortgage insurance is insurance that protects the lender if a borrower defaults on a conventional mortgage.
PMI is commonly associated with conventional mortgages where the borrower’s down payment is less than 20% of the home’s purchase price.
It is important to understand that PMI protects the lender, not the homeowner.
Because PMI adds to the monthly cost of a mortgage, borrowers often want to know when they can cancel it.
Why Do Some Borrowers Have PMI?
A larger down payment generally gives a borrower more equity in the property from the beginning.
When a borrower makes a smaller down payment, the lender may have greater exposure to potential losses if the borrower defaults.
PMI can help reduce that risk for the lender.
For example, consider a home purchased for $400,000.
A 10% down payment would be $40,000, leaving a $360,000 mortgage balance.
Because the borrower started with less than 20% equity, PMI may be required on a conventional loan depending on the specific loan terms.
How Much Does PMI Cost?
PMI costs vary based on factors such as:
- Loan amount
- Down payment
- Credit profile
- Loan type
- Property type
- Mortgage insurance provider
- Other loan characteristics
Because of these differences, there is no single PMI amount that applies to every borrower.
Some homeowners may pay a relatively small monthly amount, while others may have a significantly larger PMI expense.
Review your loan documents to determine exactly how much PMI you are paying.
When Can PMI Be Removed?
For many conventional mortgages, PMI can potentially be canceled once you reach sufficient equity in the property, subject to the requirements that apply to your loan.
One important benchmark is reaching 20% equity based on the original value of the property.
For example, if you purchased a home for $400,000, 20% equity would represent $80,000.
That would correspond to a mortgage balance of approximately $320,000 if the original property value is still the applicable reference point.
However, reaching 20% equity does not necessarily mean PMI automatically disappears that same day.
You may need to request cancellation and meet the applicable requirements.
Does PMI Automatically Go Away at 20% Equity?
Not necessarily.
There is an important distinction between being eligible to request PMI cancellation and PMI automatically terminating under the terms of the mortgage.
Depending on the loan, PMI cancellation may require the borrower to contact the mortgage servicer and make a formal request.
The servicer may also have requirements regarding:
- Payment history
- Property value
- Current mortgage balance
- Property condition
- Other eligibility criteria
Check your mortgage documents or contact your servicer to determine the specific requirements for your loan.
What Is the Difference Between PMI Cancellation and Automatic Termination?
PMI cancellation and automatic termination are not necessarily the same thing.
PMI cancellation generally involves the borrower requesting that the mortgage insurance be removed after meeting the applicable requirements.
Automatic termination occurs under the applicable mortgage insurance rules when the loan reaches the required point for termination, assuming the necessary conditions are satisfied.
Understanding this distinction can prevent homeowners from assuming that PMI will disappear immediately after reaching a certain equity level.
Can You Remove PMI Based on Your Home’s Increased Value?
Potentially, depending on your loan and the applicable requirements.
Home values can increase over time.
If your home is worth significantly more than when you purchased it, you may have more equity than your original mortgage payment schedule suggests.
For example, suppose you purchased a home for $400,000 and borrowed $360,000.
Your initial equity was $40,000, or 10%.
Several years later, suppose your mortgage balance has fallen to $340,000 while the home’s market value has increased to $450,000.
Your estimated equity would now be:
$450,000 – $340,000 = $110,000
That represents approximately 24% of the home’s current value.
Whether that increase in value can be used to remove PMI depends on your specific mortgage and servicer requirements.
Can You Request a New Home Appraisal to Remove PMI?
In some situations, a borrower may be able to use an updated property valuation when requesting PMI cancellation.
However, the lender or mortgage servicer may have specific requirements for how the property’s value must be established.
They may require a particular type of valuation or appraisal.
You should contact your mortgage servicer before paying for an appraisal to determine whether the valuation will qualify for PMI cancellation purposes.
Can Making Extra Mortgage Payments Remove PMI Faster?
Potentially, yes.
Making additional principal payments can reduce your mortgage balance faster than the original amortization schedule.
If your loan balance reaches the applicable threshold sooner, you may become eligible for PMI cancellation earlier than originally projected.
For example, imagine your scheduled mortgage payments would bring your loan balance to the required PMI cancellation threshold several years from now.
If you make additional principal payments, you may reach that balance sooner.
Before making extra payments specifically to eliminate PMI, however, consider your overall financial situation.
You may also have higher-interest debt, emergency savings needs, retirement contributions, or other financial priorities.
Does Refinancing Remove PMI?
Refinancing can potentially eliminate PMI, but it is not automatically the best solution.
Suppose your current mortgage includes PMI because you originally made a small down payment.
If your home’s value has increased significantly, you may now have enough equity to qualify for a new mortgage without PMI.
A refinance could potentially remove the monthly mortgage insurance payment.
However, refinancing comes with costs and can change your interest rate, loan term, monthly payment, and total interest expense.
You should compare the potential PMI savings against the costs of refinancing.
Is Refinancing Worth It Just to Remove PMI?
Not always.
Suppose you are paying $150 per month in PMI.
That equals:
$150 × 12 = $1,800 per year
Saving $1,800 per year may sound attractive.
But if refinancing costs thousands of dollars, the savings may take several years to recover those costs.
You also need to consider whether your new mortgage rate is higher or lower than your current rate.
A homeowner should evaluate the complete financial picture rather than looking only at the PMI payment.
Can FHA Mortgage Insurance Be Removed the Same Way?
FHA mortgage insurance works differently from conventional PMI.
This is an important distinction for homeowners.
FHA loans generally use mortgage insurance premiums rather than conventional PMI, and the rules governing how long that insurance remains in place can differ depending on the loan’s characteristics and when it was originated.
For some FHA borrowers, refinancing into a conventional mortgage may be one potential way to eliminate FHA mortgage insurance if they have sufficient equity and otherwise qualify.
However, refinancing should be evaluated carefully because it creates a new mortgage and associated costs.
What About VA Loans?
VA loans generally do not use conventional PMI.
Instead, eligible borrowers may have other loan costs associated with VA financing, including the VA funding fee depending on the borrower’s circumstances.
This means the question of removing PMI generally applies differently to conventional mortgages than to VA loans.
Borrowers should evaluate the specific costs and requirements associated with their loan program.
How Does PMI Affect Your Monthly Mortgage Payment?
PMI can increase the amount you pay each month.
For example, imagine your principal and interest payment is $2,000 per month and your PMI is $150.
Your payment before considering other costs would be:
$2,000 + $150 = $2,150
Your actual total housing payment could be higher if it also includes property taxes, homeowners insurance, HOA dues, or other costs.
Removing PMI could therefore reduce your monthly mortgage expense.
What Happens After PMI Is Removed?
When PMI is removed, the amount you were paying toward mortgage insurance can generally stop being included in your payment.
Your principal and interest payment does not automatically decrease because your mortgage balance and interest rate have not necessarily changed.
Instead, the mortgage insurance portion of the payment is eliminated.
For example:
Principal and interest: $2,000
PMI: $150
Before PMI removal: $2,150
After PMI removal: $2,000
Taxes, insurance, and other escrowed costs could still apply.
How Can You Check Whether You Are Close to Removing PMI?
Start by reviewing your mortgage statement.
Look for information such as:
- Current principal balance
- Original loan amount
- PMI amount
- Interest rate
- Loan type
- Original property value
You can then compare your current mortgage balance with the equity threshold applicable to your loan.
If you believe you may qualify for PMI cancellation, contact your mortgage servicer and ask about the specific requirements.
What If You Have a Low Mortgage Balance but PMI Is Still Being Charged?
Don’t assume PMI will automatically disappear because your balance has become significantly lower.
Contact your mortgage servicer and ask for a review of your PMI status.
The servicer can tell you:
- Whether you are eligible to request cancellation
- What documentation is required
- Whether an appraisal is necessary
- Whether your payment history meets the requirements
- When automatic termination may apply
Keeping track of your mortgage balance can help you identify when it may be worth asking the question.
Common PMI Mistakes Homeowners Make
Assuming PMI Is Permanent
PMI on a conventional mortgage may not need to remain for the entire life of the loan.
Depending on your circumstances and loan requirements, you may eventually be able to cancel it.
Waiting for the Servicer to Contact You
Some borrowers assume the lender will automatically notify them when they can request cancellation.
It is worth monitoring your own mortgage balance and asking questions when you approach the applicable equity threshold.
Ignoring Home Appreciation
If your home’s value has increased substantially, you may have more equity than your original payment schedule indicates.
Depending on your loan requirements, that increased equity could potentially affect your PMI eligibility.
Refinancing Without Doing the Math
Refinancing solely to eliminate PMI may not make financial sense if the closing costs are too high or the new loan terms are unfavorable.
Confusing PMI With Other Mortgage Insurance
Conventional PMI, FHA mortgage insurance, and other forms of mortgage-related insurance do not necessarily follow the same rules.
Your loan type matters.
Should You Make Extra Payments Just to Remove PMI?
It depends on your circumstances.
If you are only a relatively small amount away from the applicable PMI cancellation threshold, an additional principal payment could potentially help you reach it sooner.
But you should compare that strategy with your other financial priorities.
For example, if you have credit card debt carrying a high interest rate, paying down that debt may provide a greater financial benefit than making additional mortgage payments.
Your emergency fund and retirement savings should also be considered.
What Should You Ask Your Mortgage Servicer?
If you think you are approaching PMI removal eligibility, consider asking:
- How much PMI am I currently paying?
- What is my current mortgage balance?
- What is the applicable PMI cancellation threshold for my loan?
- Can I request PMI cancellation?
- What requirements do I need to meet?
- Do I need an appraisal or other property valuation?
- Is there a fee for the PMI cancellation process?
- When would PMI automatically terminate under my loan terms?
- Can increased home value be considered?
- What documentation do you need from me?
Getting clear answers can help you determine whether it is worth pursuing PMI removal.
How OM Mortgage Can Help
Understanding PMI is only one part of evaluating the cost of a mortgage.
OM Mortgage offers multiple mortgage programs for borrowers with different financial situations, including conventional, FHA, VA, USDA, jumbo, and other specialized loan options.
If you are considering purchasing a home, refinancing, or comparing mortgage options, discussing the full cost of each loan can help you understand how mortgage insurance, interest, closing costs, and other expenses affect your overall budget.
A mortgage professional can also help you compare available loan structures before you decide which option fits your situation.
Conclusion
PMI can make homeownership possible for borrowers who do not have a 20% down payment, but it can also add to the monthly cost of a mortgage.
For conventional loans, homeowners may eventually be able to cancel PMI when they meet the applicable equity and loan requirements. In some situations, increased home value or additional principal payments may help a borrower reach the necessary equity sooner.
The important thing is to understand your specific loan terms rather than assuming PMI will automatically disappear at a particular point.
If you believe you have enough equity to remove PMI, review your mortgage statement and contact your mortgage servicer to determine whether you qualify and what steps are required.
