Blog · Money basics
If your down payment was under 20 percent, there is probably a line on your mortgage statement you have never really looked at: private mortgage insurance. It might be $120 a month. It might be $250. And the most common question about it is a good one: what is PMI, and how do you get rid of it faster? The short version is that it protects your lender, not you, and you can usually kill it years before your loan schedule says you will.
PMI is required on most conventional loans when you put down less than 20 percent. It is the lender's insurance against you defaulting, and you pay the premium. The typical cost runs 0.5 to 1.5 percent of the loan balance per year. On a $300,000 loan with 5 percent down and a 740 credit score, that works out to roughly $176 a month, or a little over $2,100 a year, tacked onto your payment for the lender's benefit.
Federal law sets two clear thresholds. You can request cancellation once your loan balance drops to 80 percent of the home's original value, which is 20 percent equity. Your lender is required to drop PMI automatically at 78 percent of the original value, provided you are current on payments. That automatic cancellation runs off the original amortization schedule, which on a 30-year loan typically takes about a decade. The 80 percent route is the faster one, but it is not automatic: you have to ask, in writing, with a good payment history.
Take a $350,000 home bought with 10 percent down. The loan is $315,000, and PMI at these numbers runs roughly $170 a month. You can request cancellation when the balance hits 80 percent of the original value, which is $280,000. That means paying down $35,000 of principal. On a standard 30-year schedule that takes about 9 years. Add $200 a month in extra principal payments and you get there in about 6 years. Three years of PMI at $170 a month is a little over $6,000 saved, which is a strong return on $200 a month.
The second fast route is the appraisal. If your home has gained value since you bought it, a new appraisal can prove you already have 20 percent equity on the current value, even if the loan balance has barely moved. This is the route most people overlook. Check what comparable homes are selling for, and if your loan is within shouting distance of 80 percent of the current value, call your servicer and ask about their reappraisal process. Some lenders require the loan to be at least two years old, so check their specific rules before paying for an appraisal.
The first mistake is assuming PMI drops off automatically at 80 percent. It does not. Automatic cancellation happens at 78 percent, and only off the original amortization schedule. If you are anywhere near 20 percent equity, you must request cancellation in writing, or you keep paying for the lender's insurance out of habit.
The second mistake is confusing PMI with FHA mortgage insurance. FHA loans carry MIP, not PMI, and the rules are worse: an upfront premium of 1.75 percent of the loan plus a monthly charge that lasts for the life of the loan if you put down less than 10 percent. The only way out of FHA MIP is refinancing into a conventional loan. If you are shopping for a loan now, that difference alone is worth understanding.
If I were paying PMI today, I would check my home's current value before doing anything else. The appraisal route is the cheapest exit in a rising market, and it is free to ask the servicer what their rules are. If the value is not there yet, I would set up the extra principal payment and calendar a reminder to request cancellation the month the balance crosses 80 percent. PMI is a tax on impatience, and it rewards the people who watch the number.
And give the rest of the payment the same scrutiny. Run it through the 50/30/20 budget rule with real numbers and the pay stub audit. PMI is one line item, but the whole monthly payment deserves a look while you are at it.
Private mortgage insurance is a policy that protects your lender, not you, if you default. It is required on most conventional loans when your down payment is under 20 percent, and it is added to your monthly payment.
Typically 0.5 to 1.5 percent of the loan balance per year, depending on credit score and down payment. On a $300,000 loan with 5 percent down and a 740 credit score, that is roughly $176 a month.
Yes. Request cancellation in writing once your balance reaches 80 percent of the home's original value. If the home has appreciated, a new appraisal can prove 20 percent equity on the current value sooner.
At 78 percent of the original purchase price, by law, if you are current on payments. FHA loans are different: their mortgage insurance premium cannot be canceled without refinancing into a conventional loan.
It can be, if current rates are favorable. Weigh the closing costs against the monthly PMI savings: at $170 a month, three fewer years of PMI is over $6,000 saved.
One practical money guide a week. Real numbers, no fluff.