How to Remove PMI From an FHA Loan

You may be able to remove PMI from your FHA loan if you meet certain conditions. Find out how and when you can get rid of this extra insurance.

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Introduction

Private mortgage insurance, or PMI, is insurance that lenders require borrowers to have when they get a mortgage and don’t have a down payment of at least 20% of the home’s value. So if you bought a home for $250,000 with a 10% down payment, and got an FHA loan requiring a 3.5% down payment, you would be required to pay PMI for the length of the loan.

You could cancel PMI when you reach 22% equity in the home by asking your lender to modify your loan (specific conditions must be met), or by refinancing into a conventional mortgage once you reach 80% equity in the home. However, there is another way to remove PMI from your monthly mortgage payment – and that’s by making extra payments each month until your outstanding loan balance falls below 80% of your home’s value.

Here’s an example of how this works: let’s say you took out an $180,000 mortgage with 10% down ($20,000), and got an FHA loan requiring a 3.5% down payment ($6,300). Your original monthly mortgage payment would be $1,395 ($1,180 principal and interest + $215 monthly PMI).

But if you make extra payments of just $100 per month – which is only about $3 more than what you would pay each month in interest without any extra payments – you would pay off your loan in 29 years and 8 months instead of the original 30 years. And best of all, you would save more than $30,000 in interest charges!

What is PMI?

PMI is short for private mortgage insurance. This is a type of insurance that lenders require when a borrower makes a down payment that is less than 20 percent of the purchase price of the home. PMI protects the lender in case the borrower defaults on the loan.

The cost of PMI varies, but it is typically 0.5 percent to 1 percent of the loan amount, depending on the type of loan and thedown payment amount. For example, if you have a $200,000 loan with a 5 percent down payment, your PMI would be $1,000 per year, or $83 per month.

If you make a higher down payment, you may not have to pay for PMI at all. Another way to avoid paying PMI is to get a government-backed loan such as an FHA loan or a VA loan. With these loans, the government agrees to insure the lender against defaults, so PMI is not required.

How to Remove PMI

PMI, or private mortgage insurance, is required on all FHA loans with a down payment of less than 20%. Once you reach a 78% loan-to-value ratio, you can contact your lender and request that the PMI be cancelled. You must have a good payment history, and you must be current on your payments in order to have the PMI removed.

Use a conventional loan

The easiest, albeit most expensive, way to get rid of PMI is to simply take out a conventional loan. In order for a lender to remove PMI from your monthly mortgage insurance payments, you usually have to refinance into a non-FHA loan. With that said, if you have at least 20% equity in your home, refinancing into a conventional loan should be easy since you won’t need FHA approval.

Make a larger down payment

If you’re able to put down a larger down payment on your home, you may be able to avoid paying PMI altogether. Depending on the type of loan you’re using, you may need to put down as little as 5 percent or as much as 20 percent to avoid paying PMI. For example, if you buy a $200,000 home with a 5 percent down payment, you’ll have a $190,000 mortgage. But if you can come up with a 10 percent down payment, you’ll only have an $180,000 mortgage.

Refinance your loan

The most direct way to stop paying PMI is to refinance your mortgage. You’ll need to have at least 20 percent equity in your home to get rid of PMI on a conventional loan. refinancing will also allow you to withdraw some of your home equity as cash (known as a cash-out refinance).

Conclusion

You’ve made regular mortgage payments and built up equity in your home. You might even be earning some equity each month as your home value increases. At some point, you might reach a point where you have 20% equity in your home and, as a result, you no longer have to pay PMI.

You can ask your lender to remove PMI when you reach 20% equity, but there are other ways to remove it as well. You might be able to cancel PMI if you refinance your mortgage into a conventional loan. Or, if you sell your home, you can request that the buyer pay the remainder of your mortgage balance so that you don’t have to pay PMI anymore.

Whatever route you take, make sure you understand the requirements and process for removing PMI from your loan so that you can save money each month on your mortgage payment.