When you purchase a home, your lender requires you to purchase something called private mortgage insurance, which protects them in the event you default on the loan. You can avoid paying PMI by putting 20 percent down on the loan, but you’ll also be able to ditch PMI once you reach 20 percent equity in your house. To calculate equity, you’ll simply multiply the original purchase price by 80 percent to determine at what point you’ll have the 20 percent equity necessary to cancel PMI.
Mortgage Calculator for PMI Removal
Unless you pay 20 percent down at closing, if you have a conventional loan you’ll pay PMI. Each year, this will add around 0.03 to 1.5 percent to your mortgage payments. You can request that your lender cancel PMI once you have 20 percent equity in the home, but it’s important to monitor this and make sure it gets done.
The easiest way to keep an eye on your equity is to routinely use one of the many mortgage calculators available online. Just plug in some numbers and you’ll have your answer. Your mortgage company should send you an annual statement that lets you know your remaining balance, and the calculator will tell you the percentage you have paid toward PMI removal.
Manual PMI Removal Calculation
Instead of using an online mortgage calculator, you may want to do those calculations manually. The calculation is easy. You’ll simply multiply the original purchase price of the house by 80 percent. If you paid $250,000 when you closed on your house, you’ll be ready to remove PMI once you have only $200,000 remaining on the loan.
Before you can be approved for PMI to be removed, though, you’ll also have to show that your home is at least worth what it was when you bought it. In other words, if property values in your area have dropped since you moved in, you could face a rejection. Some lenders may even require you to have an appraisal done in order to document your home’s value if you’re requesting that PMI be removed.
How to Remove PMI
If you’ve calculated and determined you have at least 20 percent equity in your home, your next step will be to request removal of your mortgage insurance. Your request must be in writing, and it must follow whatever requirements your lender has in place. This may include providing documentation that there are no liens on your home.
Before they’ll remove PMI, some mortgage companies may require that you have a solid history of paying your monthly payments on time. Before removing insurance on your loan, your lender has a vested interest in making sure you’re not going to default on your loan, and a spotty history could be an early warning sign of that. If you’re routinely late or you’ve almost reached the point of foreclosure, your lender has the right to deny your request to remove PMI.
Automatic Removal of PMI
The good news is, if you pay PMI and you do nothing whatsoever, your mortgage company eventually will automatically remove it. Under the Homeowners Protection Act, lenders are required to cancel PMI once a mortgage reaches the 78 percent mark. You’ll need to be current on your payments for this to happen.
Although you are protected by the automatic cancellation, it’s still important to keep an eye on it. If for some reason your lender misses it, you’ll need to catch it as soon as possible to avoid paying PMI for longer than you have to. In the rare case where a homeowner doesn’t reach 78 percent by halfway through the loan, PMI will be automatically canceled as well. So, even if you don’t get that autocancellation, your PMI should be canceled at the 15-year mark if you have a 30-year loan.
- If your loan is classified as one with high risk, you may have to attain a higher percentage of equity before you can stop paying PMI.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.