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PMI: What It Is, Why You're Paying for It, and How to Get Rid of It

PMI, or private mortgage insurance, is an extra insurance required by your lender when you put less than 20% down on your home purchase. It’s not insurance on the home itself, but insurance on your continued payment to the lender. Statistically speaking, the less money a buyer puts down on a home, the more likely they are to default on payment. In the unfortunate case of a default, the PMI policy will reimburse your lender for monies lost due to lack of payment.

PMI makes good financial sense on the part of the lender. Unfortunately, it’s you, the buyer, that pays the premium. PMI can easily add $100 or more to your monthly mortgage payment. Since there are no perceived benefits or protections for you, it makes sense to drop PMI as soon as allowable.

By law, lenders are required to drop your PMI when your loan-to-value ratio reaches 78%. However, they will usually drop it upon request when your loan-to-value ratio reaches 80%. That 2% in between may not seem like much, but on a home valued at $200,000, 2% equals $4,000. That’s $4,000 that belongs in your pocket.

The problem is that your lender would likely prefer to have that extra protection so long as you’re willing to foot the bill, so you can’t realistically expect them to let you know when you’re at 80%. You’ll have to take it upon yourself to do some very simple math to determine your loan-to-value ratio.

Just follow this simple formula to calculate loan-to-value percentage:

Mortgage amount owed / appraised value of home = loan-to-value ratio

For example:

John owes $90,000 on his mortgage. His home is worth $120,000.

90,000 / 120,000 = .75 (or 75%)

If you put down less than 20% when you purchased your home and are still paying PMI, do the math to find your 80% mark. Once you hit that mark, call your lender and request that they drop the PMI. Save that 2% — you’ll be glad you did!