PMI is a type of mortgage insurance that protects the lender if a borrower fails to make payments on their mortgage. PMI is almost always required on conventional (i.e. not government-backed) mortgages if you make a down payment of less than 20%. If for any reason you can’t make payments and the property goes into foreclosure, PMI helps your lender recover their money.
PMI typically ranges from 0.3% to 1.5% of your loan amount annually, but may be higher or lower depending on your loan-to-value ratio. That may not sound like much, but it can amount to tens of thousands of dollars over the time you have to pay PMI. As such, it’s in your best interest to cancel it as soon as you can.
How home values affect PMI cancellation
Your home’s value places a significant role in whether or not you have to keep paying PMI. Any sort of substantial increase in home value translates to an increase in your home equity, which directly lowers your LTV ratio — the primary metric used to determine whether or not you need PMI.
If you know your home has gained value, you don’t have to go through the refinancing process to use that value to eliminate PMI. Home appraisals typically range between $250 to $500, but the savings you gain from eliminating PMI will more than offset that. (Some lenders might also accept a broker price opinion, which is cheaper than a professional appraisal.)
Whether you’re in a hot real estate market or you’ve invested in home improvements, you should have an idea if your home has gained substantial value since you bought it. If you’ve owned the home between 2 to 5 years, your remaining mortgage balance must be no more than 75% of the home’s new appraised value. If you’ve owned the home for longer than five years, the loan balance must be no more than 80% of the new valuation.
When can PMI be removed?
PMI is more common than ever today, active on 15.7% of all mortgages.2 In the pandemic homebuying boom, more than two million new mortgages carried PMI.
When you’ll stop paying PMI depends on your loan- to-value ratio (LTV), or how much equity you’ve built in your home vs. how much you have left on the mortgage. PMI can typically be removed once you have at an LTV of 80% (in other words, 20% equity in your home), or if you have made significant improvements or your home has appreciated in value.
You have 22% equity in your home (automatic cancellation)
When your loan-to-value (LTV) ratio drops to 78%, the lender or servicer is legally obligated to terminate PMI. This means that when your mortgage balance reaches 78% of the original purchase price (and your mortgage is in good standing), you no longer have to pay PMI.
PMI also automatically terminates at the halfway point of your amortization schedule, even if you haven’t reached a 78% LTV ratio yet. This means that at the 15-year point of a 30-year mortgage, you do not have to pay PMI anymore. (Although most homeowners will have reached the equity threshold by this point unless they made a very unfortunate investment.)
You have 20% equity in your home (early cancellation)
PMI can be removed early when you reach an LTV of 80%, which can happens when:
- You make extra payments: If you’ve made extra payments or overpaid in certain months, you might not have to wait for automatic PMI cancellation. When your loan balance reaches 80% of the home’s original value, you may request PMI cancellation. By prepaying the principal on your loan, it will reduce your loan balance, helping you to gain equity faster and save on interest payments. If you ever have some extra money lying around, it’s a good idea to apply a lump sum to your principal because it will lower interest and insurance costs while helping you get to the 20% equity you need to request to cancel PMI.
- Your home goes up in value: Homeowners with mortgages saw a year-over-year equity increase of 15.8% in 2022.1 Although the housing market slowed down in 2023, home value increases may allow homeowners to cancel PMI earlier than they would be able to otherwise.
You can find the date that you’ll reach 80% on your PMI disclosure form. If you can’t find it, request it from your mortgage lender or loan servicer.
You refinance
Many homeowners refinance their mortgages when rates are low to save on interest rates or reduce monthly payments. An added benefit of refinancing is that it could eliminate PMI if your new mortgage balance comes in below 80% of the home’s value.
This is where your increased home value comes in handy. If you bought your home five years ago and recent comparable sales are for 15% more than you paid, there’s a good chance your home will appraise for 15% more than you bought it for. When you refinance, you’ll benefit from that value increase because suddenly what you owe on the mortgage is offset by the home’s increased value.
Let’s look at a simplified example.
In 2015, you made a $50,000 down payment on a $500,000 home, taking on a $450,000 mortgage balance.
In 2023, the home appraised for $600,000. You’ve paid $75,000 towards the loan principal, bringing your loan balance down to $375,000. You now owe just 62.5% of the home’s value (375,000/600,000).
In this instance, you can eliminate PMI.
Many loans carry a “seasoning requirement” that states you must own the home for at least two years before you can refinance to get rid of PMI. As such, this strategy isn’t as useful for new homeowners.
How to get rid of PMI: step-by-step guide
In many cases, you won’t have to do anything to cancel PMI except make your mortgage payments on time until you’ve met the automatic termination conditions. But if you think your home has increased in value, you may be able to cancel PMI even earlier. Every situation is a little different, depending on the conditions and standing of your loan.
Assuming that you’re in good standing on your mortgage and you believe your home has increased in value to the point that your LTV ratio is less than 80%, you can follow this general process:
1. Make all of your payments on time
This one is a no-brainer. You must be in good standing on your mortgage loan, with a demonstrated history of making payments on time to have your PMI removed. If you’ve made late payments within the last year, you will almost definitely be disqualified. A late payment is usually defined as one that is more than 30 days late.
Another important point: Make sure you don’t have any outstanding liens on your property from things like unpaid contract work, second mortgages, back taxes, or outstanding HOA dues. Basically, just make any payments you owe on time.
2. Own your home for longer than two years
This is a passive step, but it’s an important one. How long you’ve owned the home has implications for removing PMI. Many lenders have a “seasoning” requirement on loans before you may qualify for PMI removal. For loans between two and five years, you must have an LTV ratio of 75% or less to qualify for PMI removal, or 80% or less if you’ve had the loan for more than five years.
While a lender must drop your PMI when you’ve reached 22% equity from paying down your home loan, that does not take into account increases in home value. As such, if your home value has increased to lower your LTV ratio to 25%, you still have to prove this home value increase to get your lender to drop the PMI. In the first year of your loan, you may not have reached the “seasoning” requirement, but in the third year of your loan, you’re probably okay. It all depends on your specific lender’s requirements.
3. Prove your home value
We laid out the common conditions in which you can request PMI cancellation. Market conditions or home improvements may add substantial value to your home, raising your home equity without you having to pay anything extra. Unfortunately, showing recent sales on comparable homes isn’t going to sway your lender to drop PMI.
Instead, the best way to find out if your home has increased in value enough to reach the LTV ratio for PMI cancellation is to get a home appraisal. (Some lenders in certain areas may also accept a more affordable broker price opinion.)
Before you schedule an appraisal, check with your lender about any terms or conditions that need to be met. You might need to arrange the appraisal through them rather than hiring on your own dime.
Once you’ve figured out the requirements, schedule a professional appraisal to find out the “real” value of your home. Then, do the math to figure out if the principal amount you owe on your loan is less than 80% of the appraised value of your home.
→ Find out how much your home is worth
4. Make a written or verbal request for cancellation
When you’re sure your home value has increased enough to qualify for PMI cancellation, contact your lender to figure out the process. You might need to submit a written request, but often a phone call is enough to document the request and begin the process.
FAQs
Here are some frequently asked questions about PMI and home values.
How long does PMI last?
If you made a down payment of less than 20%, most lenders require you to pay PMI until you’ve reached an 80% loan-to-value (LTV) ratio. If your loan is in good standing and you’ve met “seasoning” requirements, you may request PMI cancellation. Otherwise, PMI automatically terminates when you’ve reached 22% home equity or when you’ve reached the midway point of your loan term.
Is PMI based on appraisal value?
The amount you pay in PMI is a percentage of your principal mortgage loan amount. It is not impacted by appraisal. However, if your home increases in value to the point that you have gained substantial equity, a home appraisal will help prove to your lender that you qualify for PMI removal.
Does PMI go away if my home value goes up?
If your home value goes up, you may have gained enough home equity to qualify for PMI removal. Follow the process covered in this piece to figure out what you need to do to stop paying PMI.
Article sources:
- CoreLogic: “Homeowner Equity Insights – Q3 2022.”
- Urban Institute: “Mortgage insurance and data at a glance – 2021”
