If you’re like most people, the monthly mortgage payment isn’t the thing that worries you the most when you’re ready to buy a house. Its having enough saved for a down payment.
Many homebuyers assume you need to have a down payment equal to 20% of the homes value. Thats not the case. There are some benefits to putting down that much money at the beginning, but if you can’t, you might still be able to get a mortgage with mortgage insurance.
Getting a mortgage is an exciting step on the way to becoming a homeowner. Conventional loans with less than 20% down, on the other hand, come with an extra cost: private mortgage insurance (PMI).
Many homebuyers wonder how long will I be paying this extra fee? When can I get rid of PMI?
The good news is PMI doesn’t last forever, Here’s what to know about the timeline for paying and removing mortgage insurance with a conventional loan
What is PMI and Why is it Required?
First, let’s cover the basics. PMI stands for private mortgage insurance. It’s an insurance policy that protects the lender if you default on your home loan.
Lenders view loans with less than 20% down as riskier, since you have less equity invested. PMI helps offset that risk. That’s why if your down payment is under 20%, your lender will require PMI.
PMI is paid as an annual premium, rolled into your monthly mortgage payment. Typical PMI rates range from 0.5% to 1.5% of the loan amount each year.
So PMI isn’t a penalty or punishment. It’s the cost of being able to buy with less cash upfront through a conventional mortgage.
The PMI Removal Timeline
Now, let’s get to the big question – how long will you pay PMI?
The timeline for PMI removal depends on two key factors:
- Reaching 20% equity – At this point, you can request PMI cancellation.
- Hitting 78% loan-to-value (LTV) ratio – PMI terminates automatically at this threshold.
Reaching 20% Equity
As a general rule, you can ask your lender to cancel PMI once you have 20% equity in the home.
For example:
- You purchased a $200,000 home with 10% down ($20,000).
- Your original loan amount was $180,000.
- Once you’ve paid down the balance to $160,000 (80% of the original $200k purchase price), you have 20% equity.
At this point, you’ve hit the 20% equity mark and can request PMI removal.
Key Notes:
- You must request cancellation in writing. The lender won’t do it automatically.
- Your payment history in the prior 12 months can’t have any 30+ day late payments.
- Check your original amortization schedule to see when you’re slated to hit 80% LTV.
Hitting the 78% LTV Threshold
There’s a second timeline for PMI removal as well.
The Homeowners Protection Act says that your lender must automatically end PMI when you reach a 78% LTV on a conventional loan.
Using the same example:
- Original home purchase price: $200,000
- Original loan amount: $180,000
- When your balance reaches $156,000 (78% of $200k), PMI terminates.
At this point, the lender will remove PMI without you having to request it. But again, check your amortization schedule. If you make extra payments, 78% LTV may come sooner than expected.
How Long Does it Take to Reach 20% Equity?
So when will you actually hit these PMI removal milestones? The timeline varies based on factors like:
- Your down payment amount
- Home price appreciation
- Whether you make extra mortgage payments
It usually takes between 5 and 8 years for most people to reach equity through regular amortization. But paying off the principal early or the home’s value going up can shorten the time frame.
Here are a few examples to give you an idea:
Borrower 1
- Purchase Price: $300,000
- Down Payment: 5% ($15,000)
- Original Loan Amount: $285,000
- Hits 20% Equity: Year 7
Borrower 2
- Purchase Price: $200,000
- Down Payment: 10% ($20,000)
- Original Loan Amount: $180,000
- Hits 20% Equity: Year 5
Borrower 3
- Purchase Price: $250,000
- Down Payment: 3% ($7,500)
- Original Loan Amount: $242,500
- Home Value Appreciates 5% Annually
- Hits 20% Equity: Year 4
As you can see, higher down payments and rising home values accelerate PMI removal. But most homeowners reach 20% equity in 5-8 years through regular amortization.
Strategies to Remove PMI Faster
Don’t want to wait the full timeline to remove PMI? Here are a few options to explore:
Make extra mortgage payments – Putting any extra funds toward principal prepayment will shorten the PMI timeline. Even an extra $100/month makes a difference.
Refinance your mortgage. If rates are lower, you may be able to get rid of your PMI right away by using the value of your home’s appreciation.
Get a reappraisal – If your home has increased in value, a new appraisal confirming the equity gain may convince your lender to cancel PMI sooner.
Improve your credit score – A better score can qualify you for lower PMI rates on a new loan, reducing your premiums.
The Takeaway on PMI Timelines
While PMI might feel like an annoyance, it allows you to buy sooner with less cash down through a conventional mortgage.
And you won’t be stuck paying it forever. Most homeowners reach the 20% equity mark to cancel PMI within 5-8 years. Hitting 78% LTV triggers automatic PMI removal as well.
Understanding the PMI termination timelines gives you clarity on this temporary cost. And exploring strategies like extra payments or refinancing can potentially remove PMI even faster.
So don’t let mortgage insurance deter you from buying now. With a clear roadmap to cancellation, PMI doesn’t have to be a long-term barrier on the journey to homeownership.
Should I avoid PMI?
PMI adds to the monthly cost of your mortgage, but for many people, it can mean the difference between buying a home and not. It can take a while to save up a full 20% down payment. Putting 5% or 10% down and paying PMI can help you buy a home sooner.
What’s the difference between mortgage insurance and homeowner’s insurance?
Homeowners insurance protects the house itself, your belongings and you in case of storm damage, fire, theft and so on. Mortgage insurance protects the lender in case the borrower stops making payments on their loan.
PMI used to be tax-deductible if you itemized deductions on your federal tax return. However, that deduction expired in 2022.
How long do i pay PMI?
FAQ
How long do you have to have mortgage insurance on a conventional loan?
The most important thing to know about PMI is that it’s not forever. Usually, you can get rid of PMI from your monthly payments in two ways: when you pay off your loan balance below 80% of the purchase price of your home, or when you reach 20% equity in your home.
How long do you have to pay PMI on a 30 year mortgage?
Loan servicers must cancel PMI once you reach a 78 percent LTV ratio, based on the home’s original appraised value, or halfway through your loan’s term (15 years into a 30-year mortgage, for example).
When can I get rid of PMI on a conventional loan?
You can typically get rid of Private Mortgage Insurance (PMI) on a conventional loan when your loan-to-value (LTV) ratio reaches 78% of the home’s original value, or you can request its removal once the LTV reaches 80%.
At what point does mortgage insurance stop?
For conventional loans, mortgage insurance (PMI) is usually canceled when the loan balance reaches 2078% of the home’s original value or when the borrower reaches 2022 equity. Additionally, if you are current on your payments, you can ask for cancellation when the loan balance reaches 80% of the original value, or approximately 20% equity.