When you bought a house with less than 20% down, your mortgage lender tacked on the extra cost of private mortgage insurance (PMI) as a standard precaution. But you’re confident that your house is worth more today than when you purchased it, leading you to wonder: “Can I cancel PMI if my home value increases? When does PMI go away?”
Whether your individual mortgage qualifies for PMI removal will depend on factors like how much you still owe on the loan and your payment history.
During the pandemic housing boom, many homeowners saw their equity rise. Home values are still increasing in the current real estate market due to ultra-tight inventory. That means many homeowners with mortgages are sitting on significant equity.
Now would be a good time for many borrowers to see if they qualify for PMI cancellation. A higher equity stake in your home can lower the perceived risk of your mortgage and, in some cases, speed up the path to PMI removal. And because PMI can add tens of thousands of dollars in housing costs over the life of a loan, it’s important to consider taking steps to remove PMI as soon as you’re eligible.
Let’s take a look at how PMI works, and your options for cancellation.
Can You Cancel PMI? Check Your Home Value
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What is PMI?
PMI is a type of mortgage insurance that protects the lender if a borrower stops making payments.
PMI is usually required when you obtain a conventional mortgage and make a down payment of less than 20%. (The term “conventional” refers to a loan that’s not part of a government program).
If — for any reason — you’re unable to keep up with your mortgage payments and the property goes into foreclosure, PMI will help to cover the lender against losses.
Most homeowners who carry PMI have borrower-paid private mortgage insurance, which they pay as an additional monthly fee with their mortgage.
According to the National Association of Realtors’ 2023 Profile of Home Buyers and Sellers, the typical down payment for first-time home buyers was 8% last year — the highest amount in over 25 years. For repeat buyers, the typical downpayment was 19%.
In other words, you’re not alone in paying PMI. It’s incredibly common. Sometimes paying PMI as an extra monthly charge is well worth the ability to buy a home before you can afford 20% down.
PMI usually costs between 0.2% and 2% of the yearly loan amount, though it can be higher or lower depending on your loan-to-value ratio.