How To Get Rid Of Mortgage PMI Payments

How To Get Rid Of Mortgage PMI Payments

Military Loans

If you’ve served (or are currently serving) in the military, you are eligible for a VA Loan. These loans don’t charge PMI. There is an upfront Funding Fee that VA charges all borrowers (except those who are exempt), but there is no additional amount added to the monthly payment. This is rather remarkable considering VA requires 0% down when buying a home.

5 ways to save money and avoid paying PMI

Given how costly PMI can be, it’s no wonder many homebuyers are eager to avoid the expense. Here are five ways you can avoid paying PMI.

1. Shop around for a loan that doesn’t require PMI

Look for alternative loan programs that either waive the PMI requirement and/or give you down payment assistance. For example, VA loans don’t require PMI, so if you qualify you could save a bundle. Look into loans insured by the Federal Housing Administration (FHA) or the U.S. Department of Agriculture (USDA). Both agencies have programs aimed at making homeownership more affordable for low- and moderate-income buyers.

2. Check out state and local homebuyer assistance programs

More communities are making affordable housing a priority, and this includes developing new programs aimed at assisting home buyers. Some communities focus on what’s called “workforce housing,” which targets making homeownership affordable for people with certain occupations, such as school teachers, firefighters, or first responders. You can get started by checking out HUD’s local homebuying page for programs in your state.

3. Look for an 80-10-10 loan

One strategy to avoid PMI involves getting an 80/10/10 loan where you put 10% down and take out a 10% home equity line of credit and use that to satisfy the 20% down payment requirement, says Eric Simonson, founder of Abundo Wealth.  The line of credit will likely be variable so you will want to prioritize paying that off sooner, Simonson says. If you’re unsure how to find a lender that offers 80/10/10 loans, check with your accountant or financial advisor who can likely offer recommendations.

4. Pay a higher interest rate

Some lenders offer loans that allow you to avoid paying PMI in exchange for a higher interest rate. You’ll need to go through a qualification process, but if approved, you’ll be allowed to put down less than 20%. But your monthly mortgage payment will be higher—in some cases substantially so—because you’ll be charged a higher interest rate.

5. Buy a less expensive home

Just because you’re pre-approved by a lender for a certain amount doesn’t mean you need to max out that amount when you purchase your home. 

“I generally don’t recommend using PMI to buy a bigger home that stretches your finances, since any hiccup in your life could make your mortgage harder to pay and introduce a lot of stress,” says Stanley Himeno-Okamoto, founder of DRS Financial Partners.

A savvier approach for a first-time homebuyer might be to buy a “starter home,” a less expensive one that they can comfortably afford without having to incur PMI.

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How to Pay Less PMI

In addition to these options for completely avoiding or ending PMI, there are ways to reduce the amount of PMI, or at least to pay it in a different way that might be preferable.

One way is to use lender-paid PMI. Most PMI is paid by the borrower, but sometimes the lender will pay the PMI premiums instead. The downside here is that the lender will increase the cost of the mortgage by raising the interest rate. Another downside is that you can’t cancel lender-paid PMI unless you refinance the loan.

Another option is single-premium PMI, which calls for the borrower to pay the premium for the insurance all at once, in a lump sum at closing. This reduces the total monthly mortgage payment, but it’s not refundable.

A loan backed by the Federal Housing Administration (FHA) lets you avoid PMI with only a 3.5% down payment. The catch here is that the FHA requires borrowers to pay a mortgage insurance premium at closing as well as monthly mortgage insurance premiums for at least the first 11 years of the loan. Depending on the situation, FHA mortgage insurance may cost more or less than PMI.

Are There Any Benefits To Paying PMI As A Borrower?

Although PMI is for the lender’s protection and not the borrower, that’s not to say there aren’t some indirect benefits for the borrower. There are two big ones that we’ll go over here:

  • PMI enables a lower down payment. Because PMI offsets some of the risks for lenders in the event that the borrower defaults, it enables down payments as low as 3%. Without PMI, you would need a minimum of a 20% down payment for a conventional loan. PMI allows you to accomplish homeownership faster.
  • PMI is tax-deductible. Congress has extended the mortgage insurance tax deduction through the 2020 tax year, so if you haven’t filed your taxes yet, this is still deductible. You report it along with your deductible mortgage interest from the Form 1098 you should have received from your mortgage servicer.

Even if you have the money for a 20% down payment, it may make sense to make a smaller down payment and opt for PMI depending on your financial situation and other goals. It’s not necessarily a good idea to empty your savings.

3. Get a New Appraisal

As your home’s value rises, the principal balance stays the same and your equity increases. If you’ve noticed rising prices in your area or have completed home improvement projects, you could have over 20% equity even if you haven’t been making extra mortgage payments.

Contact your loan servicer if you think this may be the case. Lenders might be willing to cancel your PMI if you have 20% equity based on the home’s current value. However, you may need to pay for a home appraisal first.

Conventional PMI versus FHA MIP

It is important to note the difference between PMI (private mortgage insurance) and MIP (mortgage insurance premium).

  • PMI (private mortgage insurance) is applied to conventional loans. It can be canceled at 80% loan-to-value ratio (LTV), or removed automatically at 78% LTV
  • MIP (mortgage insurance premium) is applied to loans insured by the Federal Housing Administration (FHA loans). It cannot be canceled, and it will not be removed automatically — unless the homeowner bought with more than 10% down and paid MIP for a full 11 years

Because of the FHA’s mortgage insurance rules, many borrowers prefer conventional PMI. It will eventually fall off on its own, whereas most borrowers with FHA MIP are stuck paying it until they refinance or pay off their loan.

The same is true for USDA loans which require their own type of mortgage insurance called a guarantee fee.

You can read more about how to remove MIP here.

Find a Low-Downpayment Conventional Loan with No PMI

Not all conventional loans require PMI even if you have a down payment less than 20%. These mortgages will require you to pay a higher interest rate, depending on your credit score and the amount of your down payment.

SEE TODAY’S RATES

How Much Is PMI Insurance?

Although it can vary, a good general guideline is that PMI costs 0.5 – 1% of the loan amount annually.

There are several ways to pay PMI. The options available to you depend on your lender. Most commonly, PMI is paid as a monthly premium that’s added to your mortgage payment to go along with property taxes, homeowners insurance and homeowners association dues.

Other options include an upfront premium paid at closing and a combination of upfront and monthly premiums. When you receive a Loan Estimate from your lender, your PMI information will be included.

About the Author

Elizabeth Blessing

I’m an editorial writer and copywriter for financial and investment publishers.

I’ve written about growth investing for the award-winning newsletter, The Complete Investor, and about high-yield stocks for Leeb Income Millionaire and Leeb Income Performance.

Piggyback Loans

A piggyback loan (or combo loan) is when a second mortgage is used to cover part of the initial mortgage’s down payment. Going with this option will also lower the percentage required of the down payment. Instead of 20%, the home buyer will typically only need to put 5-10% down, with the rest coming from the second mortgage.

The Bottom Line On Getting Rid Of PMI

PMI is a type of insurance that protects your lender if you default on your loan. PMI gives you no protection as the buyer other than the freedom to make a smaller down payment. You must pay for PMI if you pay less than 20% down at closing. There are two types of PMI for conventional loans: borrower-paid mortgage insurance and lender-paid mortgage insurance. BPMI adds a fee onto your monthly payment but it can be cancelled when you reach 20% equity. LPMI slightly increases your interest rate instead of adding a fee. You cannot cancel LPMI. You must pay a mortgage insurance premium for the entire duration of your loan if you have an FHA loan and put less than 10% down.

You can call your lender and request to cancel BPMI when you reach 20% equity. The only way to remove LPMI is to reach 20% equity then refinance your loan.

If you’ve hit 20% and are looking to refinance, you can apply today with Rocket Mortgage® and say goodbye to your PMI.

Your PMI rights under federal law

Homeowners who pay for PMI should be aware of their rights under the Homeowners Protection Act. This federal law, also known as the PMI Cancellation Act, protects you against excessive PMI charges. You have the right to get rid of PMI once you’ve built up the required amount of equity in your home. Lenders have different rules for cancelling PMI, but they have to let you do so.

Before you sign a mortgage with PMI, ask for a clear explanation of the PMI rules and schedule. This will enable you to accurately track your progress toward ending the PMI payment. If you feel your lender is not following the rules for eliminating PMI, you can report your complaint to the Consumer Financial Protection Bureau.

Remember: You might be able to eliminate PMI under a few other circumstances, too, such as when your home value rises or when you refinance the mortgage with at least 20 percent equity.

VA loans and PMI

For eligible veterans, active duty service members, and other armed forces personnel, a VA loan is usually the best way to avoid PMI.

VA home loans are available with 0% down and do not require any monthly mortgage insurance payments. There’s only a one-time Funding Fee borrowers must pay upfront to use a VA loan.

Depending on your down payment and whether you’ve used a VA loan before, the Funding Fee is between 1.4% and 3.6% of the loan amount. But the total cost will likely be cheaper than what others pay for monthly mortgage insurance.

The lack of PMI, coupled with exceptionally low rates, is what makes a VA loan such a great deal for qualified veterans.

1. Wait for Automatic Cancellation

The federal Homeowners Protection Act of 1998 (also called the PMI Cancellation Act) requires your loan servicer to automatically cancel your PMI on the date when you’re scheduled to have 22% equity in your home. You may also see this written as the scheduled date when the principal balance is 78% of the home’s original value.

Additionally, loan servicers must cancel your PMI the month after you’re scheduled to be halfway through paying off the loan—15 years into a 30-year mortgage, for instance. The final termination occurs even if you don’t have 22% equity. Generally, this happens if you took out an interest-only mortgage, a mortgage with a balloon payment or your mortgage was in forbearance.

In either case, you must be current on your mortgage payments to qualify for automatic PMI cancellation.

How to Stop Paying PMI

If you simply wait long enough, you can stop paying PMI. Once you have paid enough principal that the loan value is equal to 80% or less of the home’s value, you can ask your lender to drop the PMI charge. Not all will do that, but they have to once the LTV has reached 78% or you’ve reached the halfway point in the loan term.

To speed up the erosion of loan principal you could make extra principal payments. If your local market is healthy and home prices are apricating, that could help reduce the LTV to the point you can request ending PMI. You could also increase the home value by doing improvements, such as adding a new bathroom or remodeling a kitchen.

Refinancing is another way to get rid of PMI. If your lender won’t drop the monthly PMI requirement but your LTV is less than 80%, you can likely refinance the loan without PMI.

Alternatives to PMI

Borrowers with low down payment also often ask: are there alternatives to PMI?

The important distinction of this question versus the “How do I avoid PMI?” question is that alternatives often have the same cost, but they are just marketed differently.

An example that illustrates this point is a jumbo loan above $417,000.

Some jumbos allow for less than 20 percent down with no mortgage insurance. This will be marketed as a way to avoid mortgage insurance. However, from a fee standpoint, you’re not necessarily saving money because you’ll pay a higher rate on this loan — just like you would with Lender Paid PMI on a conforming loan.

So technically, it’s an alternative to mortgage insurance, but you’re not avoiding the fees. This is clear in the marketing of a conforming loan with Lender Paid PMI, but it’s less clear when you’re getting a jumbo loan with less than 20 percent down, because these loans are usually marketed with phrases like “no mortgage insurance.”

How much is PMI?

You can expect to pay between $30 and $70 per month for every $100,000 you borrow, although the amount may vary based on any or a combination of the following nine factors:

  1. Your credit score and credit history. A higher credit score will snag you a lower PMI premium. If you have a foreclosure or bankruptcy within the last seven years, your premium will likely be higher.
  2. Your loan-to-value ratio. The term “loan-to-value ratio,” or LTV ratio for short, measures how much of your home’s value you’re borrowing. For example, if you make a 5% down payment on a home, your LTV ratio is 95%, because you’re borrowing money for 95% of the home’s price. The higher your LTV ratio, the more PMI you’ll pay.
  3. Your occupancy. You’ll get the cheapest PMI if you’re buying a home you intend to live in as your primary residence. Expect to pay more PMI for a second home.
  4. The type of home you’re financing. Single-family home PMI usually costs the least, while multifamily homes, condos, townhomes or manufactured home premiums are higher.
  5. How many people are borrowing. You’ll get a slight break if you’re borrowing with someone else, versus flying solo.
  6. Your debt-to-income ratio. Lenders divide your total debt by your pretax income to come up with your debt-to-income (DTI) ratio. If it’s higher than 45%, expect a bump in your PMI rate.
  7. The term of the loan. If you can afford the payment on a mortgage term of 20 years or less, you’ll get a break on your premium.
  8. Whether your rate is fixed or adjustable. Adjustable-rate mortgages (ARMs) with interest rates that can change in less than five years will require a higher PMI payment.
  9. The purpose of the loan. You’ll get the best PMI premiums if you buy or refinance your home without taking extra cash out.

Appreciation: The Key to Decision-Making

Here’s the most important decision factor: Once PMI is eliminated from the stand-alone first mortgage, the monthly payment you’ll owe will be less than the combined payments on the first and second mortgages. This raises two questions. First, how long will it be before the PMI can be eliminated? And second, what are the savings associated with each option?

Below are two examples based on different estimates of the rate of home price appreciation.

Example 1: A Slow Rate of Home Price Appreciation

The tables below compare the monthly payments of a stand-alone, 30-year, fixed-rate mortgage with PMI vs. a 30-year, fixed-rate first mortgage combined with a 30-year/due-in-15-year second mortgage.

The mortgages have the following characteristics:

Image by Julie Bang © Investopedia 2020

In the table below, the annual rates of home-price appreciation are estimated.

Image by Julie Bang © Investopedia 2020

Notice that the $120 PMI payment is dropped from the total monthly payment of the stand-alone first mortgage in month 60 (see table below) when the LTV reaches 78% through a combination of principal reduction and home price appreciation.

Image by Julie Bang © Investopedia 2020

The table below shows the combined monthly payments of the first and second mortgages. Note that the monthly payment is constant. The interest rate is a weighted average. The LTV is only that of the first mortgage.

Image by Julie Bang © Investopedia 2020

Using the first and second mortgage, $85 dollars can be saved per month for the first 60 months. This equals a total savings of $5,100. Starting in month 61, the stand-alone first mortgage gains an advantage of $35 per month for the remaining terms of the mortgages. If we divide $5,100 by $35, we get 145.

In other words, in this scenario of slow home price appreciation, starting in month 61, it would take another 145 months before the payment advantage of the stand-alone first mortgage without PMI could gain back the initial advantage of the combined first and second mortgages. (This time period would be lengthened if the time value of money were considered.)

Example 2: A Rapid Rate of Home Price Appreciation

The example below is based on the same mortgages as above. However, the following home price appreciation estimates are used.

Image by Julie Bang © Investopedia 2020

In this example, we only show a single table of monthly payments for the two options (see table below). Notice that PMI is dropped in this case in month 13 because of the rapid home price appreciation, which quickly lowers the LTV to 78%.

Image by Julie Bang © Investopedia 2020

With rapid home price appreciation, PMI can be eliminated relatively quickly.

The combined mortgages only have a payment advantage of $85 for 12 months. This equals a total savings of $1,020. Starting in month 13, the stand-alone mortgage has a payment advantage of $35. If we divide $1,020 by 35, we can determine that it would take 29 months to make up the initial savings of the combined first and second mortgages.

In other words, starting in month 41, the borrower would be financially better off by choosing the stand-alone first mortgage with PMI. (This time period would be lengthened if the time value of money were considered.)

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