How can I stop paying private mortgage insurance?

By Sabrina Karl

If you took out your current mortgage with less than a 20 percent down payment, you’re almost certainly paying for private mortgage insurance (PMI) every month. While PMI serves a welcome purpose for those who otherwise wouldn’t be able to buy a home, it’s an added expense that’s best dropped as soon as possible.

In essence, PMI is an extra fee homebuyers pay to make the lender willing to extend a mortgage when the down payment is small. If the homeowner defaults, private mortgage insurance covers most of the bank’s loss.

For any new or refinanced mortgage of more than 80 percent of the home’s appraised value, PMI is calculated during the closing process and generally broken into monthly amounts that are tacked onto the monthly mortgage payment. So when PMI can be eliminated, the monthly payment drops.

For conventional mortgages, the Consumer Financial Protection Bureau allows homeowners to request PMI elimination once their mortgage balance falls to 80 percent of the home’s value. This can occur over the course of normal mortgage payments, or more quickly if the homeowner makes extra payments. It can also occur if the value of the home has risen substantially due to market conditions or significant improvements made by the homeowner.

In order to cancel PMI at the 80 percent threshold, homeowners must make the request in writing, be current on their payments, and have a good payment history. They may also be required to prove there are no additional liens on the property, or to pay for a new appraisal.

There is one additional way to eliminate PMI, and that’s to simply wait until the mortgage falls to 78 percent of the home’s original value. At that threshold, lenders must automatically cancel PMI, though only if the mortgage is current on its payments.