If you get a conventional mortgage and put less than 20% down — which most people do — you’ll probably need to pay for private mortgage insurance (PMI). Fortunately, you’re not stuck with this added monthly cost forever. You can remove it once you build up enough equity in your house, potentially saving you hundreds of dollars a month. 

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Understanding PMI: A quick overview

When you get a mortgage that isn’t backed by a federal agency, it means added risk for the lender. When you put less than 20% down, it makes things even riskier for them. 

Why? Because if you stop repaying your loan, they’ll seize your house and sell it to make up for their losses. If the amount they lent you is pretty close to what your home is worth, they risk falling short when reselling, particularly if you leave the house in bad shape. 

To offset this risk, lenders look at the loan-to-value (LTV) ratio when underwriting a mortgage. If your LTV is more than 80%, they’re going to require you to take an extra step to protect their interests. That means buying private mortgage insurance, or PMI.

To calculate your LTV ratio, divide the loan by the value of the house. If you’re getting a $250,000 mortgage for a $300,000 home, for example, your LTV ratio would be 83%. Since you’re north of the 80% mark (i.e., putting less than 20% down), you’ll still be on the hook for private mortgage insurance. 

PMI is insurance you pay for, but it protects the lender, not you. Still, it has one distinct advantage: it lets borrowers get conventional mortgages with a down payment smaller than 20%. 

The law that lets you remove private mortgage insurance 

If you think it sounds unfair that only people who can’t put 20% down get stuck with this added expense, you’re not alone in that. Lawmakers felt similarly and worked to pass the Homeowners Protection Act of 1998 (HPA), also called the PMI Cancellation Act.

The HPA gives borrowers the legal right to ditch PMI once they’ve built up enough equity. This gets based on what that law calls the “original value” of your house. That’s either the amount you paid for it or the appraised value at the time you got your loan, whichever is lesser. 

Per the HPA, you can get rid of PMI at three different stages. 

When your LTV hits 80% (borrower-requested cancellations)

Assuming you’ve stayed up-to-date on your mortgage payments, you can request PMI cancellation when your LTV ratio hits 80% of your original value. 

You might want to do some math when you first buy your house, then. Multiply your loan amount by that 80% mark (i.e., 0.8). For our earlier example of the $300,000 home, that would mean $300,000 * 0.8. That homeowner will hit 80% — and can consequently request cancellation — as soon as their loan balance hits $240,000. 

Some lenders have specific processes for requesting PMI cancellation, but it usually just means sending them a letter to get the ball rolling. 

When your LTV hits 78% (automatic termination)

Under the HPA, your lender is legally required to cancel PMI once your equity hits 78% of your original value. 

If you don’t want to do the work to request cancellation, sitting tight until you rack up a couple more percentage points of equity will do the trick. But it will likely cost you hundreds, if not thousands, of dollars in the meantime. 

At the midpoint of your loan

Finally, the HPA dictates that lenders have to remove PMI when you’re halfway through your loan term even if you haven’t reached the 78% LTV threshold. If you have a 30-year loan, then, you’ll see PMI fall off on the first day of the month following the 15-year mark. 

Note that for all of these options, you need to be current on payments to be eligible to remove private mortgage insurance. 

Keeping an eye on your equity for value-based PMI cancellation

Some lenders go beyond the HPA and offer what’s called value-based PMI cancellation. 

With this option, you get to work with your home’s current appraised value, not its original value. Since home values have been on the rise, this could give you a way to remove private mortgage insurance even faster. 

With this option, you’ll generally need to:

• Have reached 20% equity based on the house’s current appraised value
• Pay for a professional appraisal (these usually cost a few hundred dollars)
• Be current on payments
• Have had the loan for a minimum amount of time (often, 2–5 years)

If your loan is owned by Fannie Mae or Freddie Mac — which is pretty common — you can currently ditch PMI at these points:

• At an LTV ratio of 75% if you’ve had your loan between two and five years
• At an LTV of 80% if you’ve had your loan for five or more years

You can ask your lender now if they offer value-based PMI cancellation. That way, you’ll know if it’s worth tracking your equity level across these timelines. 

How much you could save by getting rid of PMI

The amount you pay for PMI depends on the rate the lender charges you and your total loan amount. Rates of around 1% aren’t uncommon. With that $250,000 loan, then, the borrower would pay $2,500 a year, or more than $200 a month, for their PMI. 

Getting rid of that added cost as quickly as possible helps you keep more money in your pocket. If you plan to put less than 20% down, talk with your lender about your PMI removal options and how to get it canceled as soon as you can. 

If PMI cancellation isn’t coming soon or you’re paying a rate that feels overly high, you can always explore refinancing your mortgage. We can help — we’ve made it easy to compare today's latest rates.

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