How to Ditch Private Mortgage Insurance and Save Money

If you put down less than 20 percent when you bought your home, you probably have to pay for private mortgage insurance, or PMI. This insurance protects the lender if you stop making payments, but it adds a significant monthly cost to your mortgage. The good news is that PMI is not permanent. You can remove it once you have enough equity in your home, and doing so can save you hundreds of dollars each month. Here is what you need to know about getting rid of PMI.

First, understand what PMI actually costs you. The monthly premium typically runs between 0.5 percent and 1 percent of your loan amount each year, divided into twelve payments. On a $300,000 loan, that can mean an extra $125 to $250 every month. Over the course of a year, that is $1,500 to $3,000 out of your pocket for something that does not benefit you directly. The sooner you remove it, the more money stays in your wallet.

The simplest way PMI goes away is through automatic termination. By federal law, your lender must cancel PMI automatically once your loan balance falls to 78 percent of the original purchase price. That only happens if you are current on your payments and have not had any late payments recently. You do not have to do anything except keep paying on time. The lender will track your balance and send you a notice when it is time. But automatic termination can take many years if you only make the minimum payment each month.

You also have the right to request cancellation earlier. Under the Homeowners Protection Act, your lender must agree to remove PMI if you ask and your loan balance reaches 80 percent of the original appraised value of your home. That means you need to own 20 percent equity based on what the home was worth when you bought it, not what it is worth today. If home prices in your area have gone up, you might have even more equity than you think, but the lender will only use the original value unless you pay for a new appraisal.

If your home has increased in value, you can ask the lender to consider a current appraisal. You will have to pay for that appraisal, which usually costs between $400 and $700. But if the appraisal shows that your home is now worth enough that you have at least 20 percent equity, the lender will likely cancel PMI. This can be a great deal if home prices have risen sharply where you live. For example, if you bought a house for $250,000 with a 10 percent down payment, your starting equity was $25,000. If the house is now worth $300,000, your equity is $75,000, which is 25 percent of the current value. Paying for an appraisal could save you years of PMI payments.

Another route is refinancing. If interest rates have dropped since you got your mortgage, or if your home value has gone up significantly, you might be able to take out a new loan without PMI. You will need to have at least 20 percent equity in the new loan. Refinancing involves closing costs, so you have to run the numbers to make sure the savings from removing PMI and getting a lower rate are worth the upfront fees. For many homeowners, refinancing can eliminate PMI and lower their monthly payment at the same time.

Keep in mind that these rules apply to conventional loans, not government-backed loans like FHA or VA. FHA loans have their own mortgage insurance, called MIP, which works differently. For most FHA loans taken out after 2013, you have to pay mortgage insurance for the entire life of the loan unless you made a down payment of 10 percent or more. In that case, MIP drops off after 11 years. If you have an FHA loan, refinancing into a conventional loan is often the only way to get rid of the insurance premium.

To start the process of removing PMI, check your monthly mortgage statement. It should show a line item for PMI. Call your lender and ask what documentation you need. Usually they require a written request, proof that you are current on payments, and evidence that you have the required equity. That evidence can be a copy of your original appraisal or a new appraisal if you are using current value. Some lenders also allow a broker price opinion, which is cheaper than a full appraisal.

You can speed up the timeline by making extra principal payments. Even an extra $50 or $100 each month goes directly toward reducing your loan balance. Over time, that extra money pushes you closer to the 80 percent threshold. Just make sure your lender applies the extra payment to principal and not to future interest. You can also consider making a lump-sum payment when you get a tax refund or bonus.

Do not forget that PMI is different from homeowner’s insurance, which covers damage to your house. PMI covers the lender, not you. So removing it does not affect your property coverage or liability protection.

Removing private mortgage insurance is one of the biggest financial wins for a homeowner. It lowers your monthly payment, frees up cash, and helps you build equity faster. Whether you wait for automatic cancellation, request removal at 80 percent, pay for a new appraisal, or refinance, the goal is the same: stop paying for something that no longer serves a purpose. Be proactive. Know your rights under the Homeowners Protection Act. And whenever you reach that 20 percent equity mark, make the move. Your monthly budget will thank you.