Can You Get Rid of PMI Sooner Than Planned?

Don't pay for private mortgage insurance for longer than necessary.

If you purchased a home with less than 20% down, chances are good you are paying private mortgage insurance (PMI). PMI is tacked onto your monthly mortgage payment, and it typically costs 0.5% to 2% of your total loan amount per year or more. Although it's a big expense you're stuck with, it actually only protects your lender against loss by making sure they aren't out any money if they have to foreclose.

Under the law, your mortgage loan servicer is required to automatically terminate your PMI payments when your loan balance hits 78% of the original market value of your house. But this could take a long time. Fortunately, some homeowners might be able to remove PMI earlier than this threshold. Here's how.

How to get rid of PMI before hitting the 78% threshold

Although banks will automatically remove PMI once the value of your loan drops to 78% of your home's original value, you can request to have this insurance cost removed once your loan balance falls to 80% of what your home is worth.

If you have paid down your home loan to that 80% threshold, it's worth asking your lender to remove PMI as soon as possible so you don't have to pay it for any extra time. But you may actually hit that 80% threshold even sooner than anticipated if you make improvements to your home or if your house's value goes up.

See, home prices have risen quickly in many parts of the country recently, and it is possible that your home may be worth a lot more than you paid for it. Even if you haven't made a lot of progress on repaying your loan, the outstanding amount you owe may still be less than 80% of your home's current value if your property's worth has risen dramatically because of rising home prices.

Making home renovations could also potentially increase the value, so that it's worth more than you initially borrowed for it. Again, in this situation, if your home's value has risen and your current loan amount is less than that crucial 80% threshold, then you may be eligible to have PMI removed even if you didn't pay down a lot on your loan.

You will need to make a formal written request to your lender to remove PMI if you don't want to wait for it to happen automatically when your balance falls to 78% of its original worth. And you will likely need to provide a home appraisal showing its current market value so that lenders can see that your house is worth more than what you owe on it. This can cost a few hundred dollars, but it may be well worth paying to get rid of PMI from your monthly mortgage.

If you suspect your home is now worth a lot more than you paid for it but you are still paying PMI, it's worth contacting your mortgage lender ASAP to find out your options for removing PMI so you can start saving this money instead of wasting it on insurance that doesn't really protect you anyway.