This common method of removing private mortgage insurance (PMI) is potentially the worst option

Dec 4

If you have PMI on your existing mortgage, there are four ways you may qualify to remove it:

Automatic removal based on loan to original value of home
When your mortgage balance reaches 78% of the original value of the home, PMI must be dropped by the lender. You must have a good payment history. This is required by law for all lenders if the mortgage is on a single family home (including condos, townhomes, mobile homes) that is also a primary residence.
Requested removal based on loan to original value of home
PMI can be dropped a bit sooner if you proactively contact the mortgage servicer. When your mortgage balance reaches 80% of the original value of the home, you can request PMI be dropped and the lender is required to remove it if you meet the conditions above.
Request removal based on loan to current value of home
In general, it’s possible to drop PMI based on the current value of your home, but the rules can differ by lender. Usually, this requires your mortgage balance to reach less than 75% to 80% of your mortgage balance and you have your loan for at least two years. This option is not required by law, but is very common.
Refinance mortgage
If you refinance your mortgage and your new mortgage is less than 80% of the value of your home, you won’t need to pay PMI anymore.

Coze provides a free, instant PMI removal eligibility check. Check how much you could save by dropping PMI.

There are a number of reasons why you probably shouldn’t refinance your mortgage just to remove your PMI:

Refinancing is the most expensive method to remove PMI. The average closing costs for a mortgage refi was $2,375 in 2021, according to CoreLogic. If you request your PMI removal based on your current home value, you’ll likely have to pay for a broker price opinion which is only $200-$250.

Mortgage refinancing applications are long. A refi application requires extensive documentation to verify your income, assets, debt, home insurance and credit history. None of these documents is required if you request your PMI removal based on your current home value.

Refinancing has long closing times. The average refi takes 30-45 days to close. On the other hand, mortgage servicers are required to remove your PMI within 30 days from the time you requested removal or you satisfy their requirements.

No guarantee home valuation will be high enough to remove PMI. Even after the significant closing costs of a mortgage refinance and all the effort on the application, there is no guarantee that your PMI will be removed. If your home valuation is not high enough to have 20% equity, then you’ll still be stuck paying PMI on the new mortgage.

Lenders and brokers can get paid if you refi. Lenders and mortgage brokers will generally recommend you remove PMI by refinancing your mortgage, because they get paid if you refinance, but not for any of the other PMI removal methods. Their incentives are not aligned with yours, so they may not give you the best advice on your PMI removal.

PMI removal is usually not the only reason for mortgage refinancing. Many borrowers likely refinanced to lower their interest rate or take cash out of their home equity. They would have still refinanced regardless of dropping PMI; however, dropping PMI was an additional benefit from refinancing. With historically high mortgage interest rates the past two years, refinancing is now a much less attractive option for most borrowers. Therefore, this common method to remove PMI is no longer financially sound.

Most mortgage insurance protection (MIP) on FHA mortgages lasts for the life of the loan. FHA loans don’t have PMI, they have mortgage insurance premium (MIP), which has different rules than PMI removal. If your FHA loan was originated after June 3, 2013 and your original loan balance was 90% or more of your home’s valuation (i.e. you had a downpayment of less than 10%), you’ll have to pay MIP for the life of the loan. If your original loan balance was less than 90% of your home’s valuation (i.e. you had a downpayment of 10% or more), you’ll have to pay MIP for 11 years.

Refinancing into a conventional loan may remove mortgage insurance for FHA borrowers. If your current mortgage balance is less than 80% of your home value and you refinance into a conventional mortgage, you won’t need any mortgage insurance. Conventional loans have higher credit score requirements than FHA loans, so you may not qualify for a conventional loan.