PMI, or private mortgage insurance, is a way for lenders to protect against risky investments.
While this practice is understandable, it can make things difficult for homeowners, as it gets added on top of an already sizeable tower of new, monthly expenses — mortgage premiums, homeowners insurance, taxes, utilities, maintenance and upkeep, and more.
If you’re looking to avoid PMI — or trying to get rid of it on an existing mortgage — here are seven different options to consider.
1. Be a Former (Or Current) Member of the Military
If you're an American veteran, a current military member, reservist, or surviving spouse, you're in luck.
The U.S. Department of Veterans Affairs (VA) has a loan program specifically designed to make sure that American military members can afford appropriate housing with no down payment and no private mortgage insurance.
To find out if you're eligible for a VA loan, check out the official website for the U.S. Department of Veterans Affairs.
2. Piggyback Mortgage
The best way to get rid of PMI payments is to never have to make them in the first place.
A “piggyback mortgage” is any additional mortgage taken on after the principal mortgage that also refers to the same collateral as the principal mortgage.
It's an admittedly very confusing way of saying, "All you have to do is take on a second mortgage."
In order to get around the PMI requirement, you need to be able to make a down payment of at least 20%.
But, if you only have enough money for a 10% down payment, you can piggyback another mortgage on top of your first mortgage for 10% of home equity.
Get it? Now you have enough money for a 20% down payment.
That's why it's also called an 80/10/10 mortgage. Beware, though, the second mortgage will
likely not have the same terms as the first, and you might have to go to another lender to secure the financing.
3. Pay Down Your Mortgage
Once your mortgage reaches 78% loan-to-value ratio (LTV), you won't have to make PMI payments anymore. What does that mean? Let's look at an example.
If you bought a house worth $350,000 with 10% down, you spent $35,000 on your down payment. In order for PMI payments to automatically cancel, you need to multiply the value of your home ($350,000, in this case) by 22%. This is so you can reach a 78% LTV ratio.
$350,000 x .22 = $77,000.
Now all you have to do to find out how much more you have to pay is take your original down payment and subtract it from that number. Remember: since your down payment was 10%, you already started with a 90% LTV ratio.
$77,000 - $35,000 = $42,000.
The Homeowner's Protection Act has a rule that states most — but not all — mortgages need to cancel PMI payments at that number.
As long as your loan isn't FHA, you should be free and clear at that point.
4. Wait Until the Mortgage Passes Mid-Term
Another way to get rid of PMI is to wait until the mortgage passes midterm. This is another method of automatic PMI cancellation.
If you took out a thirty year loan and you've been paying down the mortgage for 15 of those 30 years, PMI will cancel.
5. If You Think Your Property Has Risen in Value, Have It Professionally Appraised
This is similar to paying down the mortgage and waiting for it to automatically cancel. If you have reason to believe that the value of your property has risen above the required 78% LTV ratio, you can have a professional appraiser inspect the house and determine its value.
If you bought a $200,000 house in a down market and now you think it's worth $230,000 because that's what other similar houses in the area selling for, that would bring you much closer to the required 78% LTV ratio that you need to ditch your PMI.
It’s also possible that the appraiser will find that the value of your home is, in fact, significantly higher than you initially suspected — which would obviously be a best-case scenario.
An alternative approach to relying on the market is making renovations and repairs that add value to your home. You just need to be careful that the amount of value a given project adds is significantly higher than the cost required to complete it.
You're going to have to pay some fees when it comes to refinancing, but the fees might be enough to offset what you'll pay in PMI.
It depends on your own particular situation: your PMI and the lender with whom you're refinancing.
7. Sell Your Home
Finally, perhaps one of the simplest ways of getting out of your PMI payments is to sell your home. This way you won't have mortgage payments, either. Or property taxes.
Of course, you’ll probably need to buy a new home, which could restart the PMI cycle all over again; however, assuming your sale is profitable, you can use it as an opportunity put yourself in a better long-term position, in regards to your new mortgage.
That is to say, you can get a different type of loan or use the proceeds of your sale to put more down up front, which can help reduce your monthly costs by significant margins.