Eliminating Private Mortgage Insurance (PMI)

1. What is Private Mortgage Insurance?

Private Mortgage Insurance (PMI) is a policy that protects the **lender** (not you) if you stop making payments on your home loan. If you purchase a home using a conventional loan and put down less than **20% of the purchase price**, lenders typically require PMI as a condition of approval.

PMI generally costs between **0.4% and 1.5% of the total loan amount annually**. On a $400,000 mortgage, a 1% rate means paying an extra **$4,000 per year ($333 per month)**, which is added directly to your monthly payment and does not build any equity.

2. The 80% Loan-to-Value (LTV) Rule

The good news is that unlike FHA loans, conventional PMI is temporary. You have the legal right to request cancellation once you have built up enough equity:

• Requested Cancellation (80% LTV): Under the federal Homeowners Protection Act, you can request that your lender cancel PMI when the outstanding balance of your mortgage falls to **80% of the original purchase price** of the home.
• Automatic Termination (78% LTV): Your lender is legally required to automatically terminate PMI on the date your loan balance is scheduled to reach **78% of the original value**, provided you are current on payments.

3. How to Request Early PMI Removal

Do not wait for automatic termination at 78% LTV. You can take active steps to request removal as soon as you hit 80%:

1. Write a Formal Request: Send a written letter or contact your lender to submit an official PMI cancellation request.
2. Have a Good Payment History: Lenders will check that you have no 30-day late payments in the last 12 months, and no 60-day late payments in the last 24 months.
3. Certify Home Value: The lender will require an appraisal or automated valuation to confirm that the value of the property hasn't declined below its original purchase price.
4. Establish No Secondary Liens: You cannot have a second mortgage (like a HELOC) that pushes your total LTV back over 80%.

4. FHA Loans and the MIP Exception

It is critical to distinguish conventional PMI from the **Mortgage Insurance Premium (MIP)** on FHA loans:

• FHA loans require **MIP** regardless of your down payment size.
• If you put down **less than 10%** on an FHA loan, you must pay MIP for the **entire life of the loan**. The only way to remove it is by refinancing into a conventional mortgage once you reach 20% equity.
• If you put down **10% or more**, MIP will automatically drop off after **11 years**.

5. Strategies to Avoid PMI at Purchase

If you want to avoid PMI from day one without putting down 20% cash, consider these alternative financing options:

• Piggyback Loans (80/10/10): You secure a primary mortgage for 80% of the price, a second mortgage (HELOC or home equity loan) for 10%, and provide 10% in cash. Because the first mortgage is capped at 80% LTV, PMI is avoided.
• Lender-Paid Mortgage Insurance (LPMI): The lender pays the PMI in exchange for charging you a slightly higher interest rate. While your monthly payment is lower, the higher rate is permanent for the life of the loan.