I came across this topic on Reddit and found this question: Best way to get rid of PMI from my mortgage without refi (source). The best way to remove private mortgage insurance (PMI) from your mortgage without refinancing is by analyzing the contract with your lender and understanding your rights under the law (which we discuss below). Some lenders will remove PMI on a home depending on the loan-to-value calculation done on the property, while almost all lenders will remove it automatically upon request by the homeowner.
We recently wrote about how to remove a name from a mortgage without a refi, but today we are examining a much more complex topic so it’s best to first off define some acronyms and terms associated with this question. After that, we can dive deeper into the best way to remove PMI from a mortgage without refi.
Mortgage terms & acronyms
PMI stands for private mortgage insurance. If you have a conventional mortgage loan, which is a loan not backed by a government agency, and make a downpayment of less than 20% on your home then PMI is a type of insurance you’re required to pay. Depending on how much your home’s purchase price was will determine how much PMI you’ll be required to pay on your home. Furthermore, depending on a few factors, PMI is tax-deductible.
BPO stands for broker’s price opinion. It’s another way of saying a reappraisal of an estimated value on a property done by an adjuster or auditor. As a homeowner, you will want to do everything you can to increase the value of your home from an appraisal so that you can drop PMI sooner.
A mortgage servicer is not your lender. A mortgage servicer sends you statements about your mortgage and handles the everyday tasks behind managing your loan. On the other hand, a mortgage lender is the actual financial institution that loaned you the money. The mortgage servicer will where you find information like what the PMI and interest are on your mortgage.
LTV stands for loan-to-value ratio. The LTV can be calculated using some simple math by taking the mortgage amount and dividing it by the overall value of a home. It’ll result in a decimal value that can be converted to a percentage, which is your LTV.
MIP means mortgage insurance premium. It’s an insurance policy paid by homeowners who take out FHA loans. MIPs are used by FHA-backed lenders to protect themselves against high-risk borrowers who are more likely to default on loans.
Lastly, UPB stands for unpaid principal balance. This definition is simple, it’s the unpaid balance left on a loan.
How to get rid of mortgage PMI from your mortgage payments?
Unlike the mortgage insurance on FHA loans (which remains through the life of the loan) PMI is, under certain circumstances, cancellable. The Homeowners Protection Act of 1998, simplified this cancellation process greatly. Where once it was an involved process to get the PMI removed from the loan, the procedure is now much more “owner-friendly”. With all qualifying loans that originated after July 1999, a homeowner has the right to request cancellation when the mortgage balance is less than 80% of the original purchase price or appraised value (whichever is less). In order to request cancellation, the loan must be current with no delinquencies in the last 1-2 years. In addition, an appraisal of the current value (at the homeowner’s cost) may be required.
The Homeowners Protection Act also stipulates (in the case of most loans) that when the balance reaches 78%, cancellation is automatic. Again, the loan must be current for the cancellation process to begin. If your loan falls into this category, simply ask your lender to remove PMI from your mortgage.
The stipulations about how to cancel PMI is listed in Chapter 8203 of Freddie Mac’s website. It’s a bit complex so we break it down for you below. There are two ways for a borrower to request cancelation of PMI: a) based on the original value of your home or b) based on its current value. If you meet the qualifications for either of these methods, your mortgage servicer has to cancel your PMI upon request.
Cancellation based on the original value
Based on the original value of your home…
- Your loan-to-value (LTV) ratio must be less than 80%
- Your mortgage is current (i.e. fully paid up to date)
- There was no payment 30 days or more past due in the preceding 12 months and there was no payment 60 days or more past due in the preceding 24 months
Cancellation based on the current value
If you instead prefer to get PMI removed based on the current value of your home, then its value must have increased since you got your mortgage or you must have made “substantial improvements” to the property. Specifically, the rule says that based on your mortgage’s current UPB and the current value, the LTV ratio must be…
- Less than 75% (with between 2 to 5 years have passed since you originated the mortgage)
- Or 80% or less, with either: a) 5 years have passed since the original mortgage date or, b) you made “substantial improvements” to the home so that you increased the market value of your property
This all might seem simple, but there are a couple of steps in the process you need to be aware of. The first of which is calculating the LTV to remove your PMI.
How do I calculate my LTV to remove my PMI
To calculate the LTV and remove the PMI from your home, the numerator of the LTV ratio, which is the top number in a fraction when dividing, must be based on the mortgage amortization schedule or the mortgage’s UPB.
A mortgage’s amortization schedule is a table that lists every payment for a mortgage over time.
A mortgage’s UPB was previously stated as the unpaid principal balance of a mortgage, which basically means the remaining amount to be paid on a mortgage.
To understand the value of your home, you need to get a home appraisal from an independent appraiser. These can cost upwards of $500, or sometimes more, so there are many online calculators that you can use for free:
Keep in mind that these tools are typically off in their calculations so use more than one to get a more precise LTV percentage.
What are “substantial improvements” to my home
If you made improvements to your home, you may be able to cancel PMI based on its current market value. Freddie Mac defines these as “substantial improvements” to a home or mortgaged premises. For an improvement to qualify as a substantial improvement, it must conform to local zoning requirements, building codes and the market value of your home has to be calculated using a current market estimate from a home appraisal, or BPO. Armed with this info, along with what appraisers look for a refinance, can empower you to get PMI removes quickly.
If you plan on removing PMI using the substantial improvements method, your payment history has to show the mortgage is current, there are no payments 30 days past due and are no payment 60 days past due in the last two years.
Can I remove MIP using the same calculation?
As previously stated, MIP stands for mortgage insurance premium and is an insurance policy paid by homeowners with FHA loans.
The main, and really only, difference between MIP and PMI is that PMI only applies to conventional loans and MIP only applies to FHA loans. The life of the home loans and how long they last will change depending on if you have MIP or PMI due to how much of a downpayment you were able to make.
Best way to refinance your home to remove PMI
Refinancing your home to remove PMI is a great option. Other than removing your PMI, there is another benefit in terms of interest rates you should be on the lookout for.
The process will consist of a reappraisal of your home so it meets LTV requirements, but after that, you’ll be able to remove your PMI. On top of that, you might be able to get lower interest rates after the refinancing process is complete.
Before doing anything, your best move will be to speak with your loan officer about the process and what you plan on doing.
You can also refer to Freddie Mac’s guide about removing PMI from your home and all of the ins and outs you need to know. It’s a detailed guide that lists everything you need to go through and which methods are available to you.
Another great source for information about getting rid of PMI is Reddit. There are threads where other people who want to remove PMI or already have removed it goes into detail about what they know.