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How to save on private mortgage insurance

Private mortgage insurance (PMI) costs new homeowners up to a thousand dollars per year, sometimes more. Your lender might make you think that this is unavoidable. We know better.

In this section we explain how you can:

  • Reduce your PMI costs

  • Stop paying PMI as soon as possible

  • Free up cash so you can do other things

Getting rid of PMI

The only way to completely avoid the additional cost of private mortgage insurance is to make a down payment of 20% or more when you purchase your home.

However, there are steps you can take after you've closed your mortgage to dramatically cut PMI's overall cost to you.

Your lender is required to notify you at closing how long you'll be charged PMI under the payment plan you've chosen. If you are a prime borrower (an individual with prime credit) your mortgage servicer is required to automatically drop the charge once you reach a loan balance of 78% of the original loan amount and most will drop it at 80%.

Loan servicers are also usually required to include information on canceling PMI on your annual account statement.

A bad credit mortgage may require private mortgage insurance until a 50% LTV (loan-to-value) ratio is reached. (Keep in mind that PMI may not be a separate charge on these mortgages, but rather factored into the interest rate.) Reaching a higher LTV may also be required to cancel PMI on converted rental properties. Check with your lender.

Making mortgage payments on time is especially important during the first few years of your loan because irresponsible payment behavior may cause your lender to require PMI past 20% equity. Make sure you're up-to-date on your account before you make any request to drop PMI.

Quicker removal of PMI is another advantage of pre-paying on your mortgage early in its life. Because PMI is based solely on home equity and, at the beginning of a mortgage, your payments go mostly toward interest - it can take quite a while to build enough equity to have it canceled. By pre-paying you can reduce your balance pretty dramatically, build equity fast, and save another few thousand dollars on PMI costs alone.

Sidebar
Did you read the section on mortgage pre-payment? You should. Pre-paying your mortgage is the simplest way to increase your home equity, and get rid of PMI faster.

Another way to stop paying PMI, is to have your home reappraised. If you think your property has appreciated enough that you may have reached 80% LTV, even though the original contract may state you haven't, consider getting your home reappraised. Watch prices on similar homes in your neighborhood and compare. Renovations and additions to your house can also increase its value and make PMI unnecessary earlier.

Next: What to do if you run into trouble with your mortgage

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