Private Mortgage Insurance: How can you get out of it

Private mortgage insurance (PMI) is a type of mortgage insurance that may be required for conventional home loans when a borrower makes less than a 20 percent down payment.

It is meant to protect the lender if the borrower stops making payments. Over the length of a mortgage, eventually, PMI is not required. A lender should automatically cancel PMI when the loan balance reaches 78 percent of the original loan value, but there are ways that the loan holder can accelerate or stop PMI payments.

Perhaps the simplest way to not have to deal with PMI is by making a 20 percent down payment when purchasing or refinancing a home. However, once you have PMI there could be ways to get out of it. Generally, that means doing something that increases the value of the home, thereby increasing a homeowners equity relative the original loan amount.

When a homeowner believes that their home value has increased enough so that PMI is no longer necessary, then they could consider refinancing their loan and if that changes the equity-loan balance, then PMI may no longer be necessary.

Home improvements that increase a house’s value will also increase a homeowner’s equity versus their loan amount. Even without any home improvements, if housing values have increased it may be worth a reappraisal to see if you are now at the 20 percent equity threshold that could mean that PMI is no longer required.

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According to the Consumer Finance Protection Bureau, to cancel PMI, the following requirements must be met.

1.            The request must be made in writing

2.            The borrower must have a good payment history

3.            The lender may require that there are no junior liens (such as a second mortgage)

4.            The lender may require proof that the value of the home hasn’t decreased below original value

In addition to automatically cancelling PMI when the loan balance reaches 78 percent of the original loan value, lenders must end PMI the month after the midpoint of a loan’s amortization schedule (which is roughly halfway through the loan cycle).