What is Private Mortgage Insurance (PMI)—And How Can I Get it Dropped?

by | BiggerPockets.com

As a responsible homeowner, you are likely familiar with the term PMI, but since it gets thrown around a lot, I thought I’d discuss what PMI is, when you need it, and how to get rid of it.

PMI stands for private mortgage insurance. Lenders require homeowners to get this when they purchase a house and put down less than 20%. (They would require the same thing for an investment, except that nearly all investments require you put down 20% in the first place, so it’s a moot point.) And they require you put that down because you’ve just made a huge investment, which they’ve financed, and they need to know that if you default on it, they can recoup their costs.

Lenders will allow you to remove the PMI once you’ve paid the equivalent of 20% of your loan. Knowing this, it does make a lot of sense to put as much money down up front as you can for a lot of reasons, one of which is that you can to eliminate the additional PMI cost or lessen the amount you will owe over time. Because the PMI requires 20%, on average it takes about 10 years to get rid of this extra cost on a mortgage that starts with only 5% down.

That said, there are some workarounds for this. The first is refinancing your home, and the second is getting it appraised. Let’s discuss what this looks like.



Related: LPMI: What is Lender Paid Mortgage Insurance and Is it Right for You?

Refinancing Your Home

We help real estate clients in Denver and Colorado Springs and have seen huge gains in both markets over the past couple of years. This can be advantageous to a recent homebuyer who lives in a neighborhood with large appreciation gains. Specifically, if your home has appreciated significantly in the past year or so, you may be able to drop your PMI. This is possible because if your home appraises high enough and you gain a significant amount of equity, you may own more than 20% of your home’s value. How’s that? Well, if the house appreciates $100k in a year and that $100k is worth more than 20% of the house value, you now own more than 20% of the house. And that qualifies you to drop your PMI.

One important point to note: Refinancing your home requires getting a new loan, and consequently, you’ll be paying closing costs all over again. That can be expensive, so it’s important to see if it’s worth it over the long-term.

Wait Two Years

This applies to hot markets again, but if you can wait two years, you can avoid closing costs. If your home has appreciated 25% or more in that two-year time frame, then you only need to pay for the cost of an appraisal (usually $400-500.) As long as your primary residence has appraised 25% or more after two years and you haven’t had any late payments in the past 12 months, you are eligible to drop your PMI. If your home is five years or older, you only need it to appraise at 20% or more.

This is a great way to save yourself some money and drop what can be a long and lengthy payment.

Questions?

Feel free to message me, as I am more than happy to discuss how this has helped out some of my clients in the past.

About Author

Erin Spradlin

Erin Spradlin co-owns James Carlson Real Estate. She loves working with first-time homebuyers for their enthusiasm and excitement, and loves working with investors because she’s a fellow spreadsheet nerd. She and her husband own three properties in metro Denver and are currently in the process of acquiring a duplex in Colorado Springs. You can find Erin’s blogs here: https://www.biggerpockets.com/renewsblog/author/erinspradlin/ and her airbnb video series here: https://www.youtube.com/playlist?list=PLgSUZKLPRI9tK3Vd-qpH3Sk2Rh-_pIrNN.

8 Comments

  1. Rodney Banks

    Hello Erin, thanks for the insight on dropping the PMI. I actually like the subject, especially when it comes to refinancing a home that a buyer may have under contract with a seller who carries own financing on a rent to own lease with an option to purchase. I love these scenarios, I am an aspiring consultant for rehabbed and customizing home solutions for first time home buyers. I don’t want my buyers to pay anymore down payment money than what they need to. I’m interested in utilizing the down payment and rental payments, which would be around 20% of equity that the buyer has into the home and for me to rehab and customize their dream home, as this would satisfy the down payment(PMI) to the bank for a cash out refinance the note. Erin, while PMI seems to be your thing, for your opinion, are there any interesting facts that you would add or take away from this idea?

  2. Alex Waite

    Hi Erin,

    Great article! I always love reading how numbers work in real estate. I have a quick question. What happens if your home does not appreciate enough to reach the 20%? For example, lets say I put 5% down and after 3 years my home does not appreciate enough to reach 20%. Between the minimal appreciation and paying principal on the loan I get it up to 10%. What are my options to get rid of the PMI? (ex. pay extra on payments, put additional 10% down?)

    • Erin Spradlin

      Thanks for the question! I’m not a lender, so I checked with mine and here is what she had to say:

      If he or she goes conventional then these are the ways to get rid of it:

      Minimum 2 years –within the 2-5 years you have to have 25% equity in order to drop it, if she gets an appraisal and it does not qualify for the PMI to be removed then it will just stay on there. She can always retry later.

      In order to get rid of it she can always put more down on the principal or wait for the house to appreciate, either way she is stuck at 25% within the 5 years or less after 5 years it’s only 20%.

  3. kevia grant

    Hey Erin great article! I’ve been in my new home two years now never been late on a payment and a few months ago my mortgage payment went down 40$. Could that have been the taxes? I want to get rid of the pmi insurance now, to save the 250$ a month, how do I do that? I have a fha loan. Do I refi? I’m on disability now , is it smart to refi?

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