Should You Refinance to Remove PMI? Compare Your Options First

You can refinance to remove PMI once your home's current value gives you about 20% equity, so the new conventional loan needs no mortgage insurance. But it is often cheaper to ask your servicer to cancel PMI. Refinancing makes the most sense when rates are favorable, your home has appreciated or you have FHA MIP that will not otherwise end.

Mortgage insurance can add a meaningful amount to your monthly payment, so it is worth getting rid of as soon as possible. The key is choosing the cheapest route.

Your options for getting rid of mortgage insurance

For background on how mortgage insurance is priced, see our guide to private mortgage insurance.

How PMI cancellation works under the Homeowners Protection Act

The federal Homeowners Protection Act gives most borrowers with conventional loans on a primary residence closed after mid-1999 clear rights:

• Borrower-requested cancellation. You can ask to cancel PMI when your principal balance reaches 80% of the home's original value, either by the original schedule or through extra payments. You generally must be current, have a good payment history and may need to show the property value has not declined and that there are no subordinate liens.
• Automatic termination. PMI must end when your balance is scheduled to reach 78% of original value, as long as you are current.
• Final termination. If neither applies earlier, PMI generally must end at the midpoint of the loan's amortization schedule, if you are current.

"Original value" usually means the lower of the purchase price or appraised value when you bought.

These rules apply to borrower-paid PMI. Lender-paid mortgage insurance is built into your rate and generally cannot be cancelled; refinancing is the usual way out of it.

When refinancing to remove PMI makes sense

Refinancing can beat waiting when one or more of these is true:

• Your home has appreciated significantly. A new appraisal may put you at or below 80% LTV years ahead of your original schedule, and your servicer's rules for value-based removal are restrictive.
• Current rates are similar to or lower than your rate. You drop PMI and may also cut your rate.
• You have lender-paid mortgage insurance. It usually cannot be cancelled any other way.
• You have FHA MIP for the life of the loan. Refinancing into a conventional loan is often the only exit.

Our guide on when to refinance walks through break-even math in more detail, and refinance closing costs shows what the $6,000 might include.

How to get rid of FHA mortgage insurance (MIP)

FHA loans carry an upfront premium plus an annual premium paid monthly. For most FHA loans with case numbers assigned after June 2013:

• Less than 10% down: annual MIP generally lasts for the life of the loan.
• 10% or more down: annual MIP generally ends after 11 years.

Loans originated before that date may follow older rules, so check your paperwork or ask your servicer.

Paying down your FHA loan does not cancel MIP the way it does PMI. For borrowers with lifetime MIP, the main way out is refinancing into a conventional loan once you have about 20% equity based on current value, plus the credit and income to qualify.

An FHA streamline refinance can sometimes lower your MIP rate or interest rate, but it keeps you in the FHA program and does not eliminate MIP. Our guide to the FHA streamline refinance and VA IRRRL explains when that option fits.

What a refinance changes besides mortgage insurance

Dropping mortgage insurance is only one part of the comparison. A refinance also changes your rate, possibly your term and your loan balance if you roll in costs. Moving from a loan with 25 years left to a new 30-year loan lowers your payment partly by stretching repayment, which can raise lifetime interest. If you refinance, consider a term close to what you have left, or keep making your old payment amount on the new loan.

Also look at the loan program itself. A conventional loan at or below 80% LTV has no mortgage insurance, but pricing still depends on your credit score and LTV, so a borrower with a modest score may see a higher rate than expected. Get a full quote showing rate, points and closing costs, then compare your total monthly housing payment before and after, rather than focusing only on the insurance line.

Steps to refinance out of PMI or MIP

1. Estimate your current value. Look at recent comparable sales nearby.
2. Calculate LTV. Divide your balance by the estimated value; aim for 80% or lower.
3. Check with your servicer first. Ask whether value-based PMI removal is possible without refinancing.
4. Get refinance quotes. Compare total monthly cost and closing costs against staying put.
5. Run the break-even. Divide refinance costs by the monthly savings from dropping insurance and any rate change.

The bottom line

On a conventional loan, start by asking your servicer to cancel PMI; it is often free or costs only an appraisal. Refinance to remove mortgage insurance when your home has gained value, rates are favorable, or you have lender-paid PMI or lifetime FHA MIP. Either way, compare total costs before you commit.