Does a Home Equity Loan Affect PMI?

A person considering a home equity loan
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If you’ve thought about taking out a home equity loan, perhaps you’ve worried whether doing so could impact your private mortgage insurance (PMI) payments. Could a home equity loan or line of credit change the cancellation date of your PMI?

Before seeking out a home equity loan, consider what’s involved and why your bank can choose whether or not to remove your PMI. Also, carefully think about the factors that can make a home equity loan a good decision—or could negatively impact your financial health.

Here’s a rundown of the good, bad, and ugly of PMI and home equity loans.

Key Takeaways

  • It is possible to get a home equity loan, even if you still pay PMI, as long as your home value has appreciated and you now own 5%-20% or more of your home’s value.
  • In some situations, your lender could choose not to cancel your PMI if you get a home equity loan or HELOC.
  • After your PMI is canceled, it can’t be reinstated later, even if you take out a home equity loan.
  • If you’re thinking of getting a home equity loan, ask your first mortgage lender how a home equity loan impacts your PMI cancellation plans.

How Private Mortgage Insurance Is Canceled

Lenders typically require you to carry private mortgage insurance (or PMI) if you put down less than 20% for your home down payment. The PMI payment is usually part of your monthly mortgage payment. If you encounter financial problems and can no longer afford your mortgage payments, PMI helps protect your lender from loss.

Because of the federal Homeowners Protection Act, when your loan’s balance reaches 80% of the home’s original value, you have the right to request the cancellation of PMI in writing. On the date your loan’s balance reaches 78% of the home’s original value, your servicer must automatically terminate PMI. However, in both cases, cancellation may depend on meeting certain requirements.

Some lenders may also allow you to cancel PMI if your home equity is at 20% due to increased home values, not due to simply paying down the balance.

After PMI cancellation, your servicer can’t require you to make additional PMI payments more than 30 days after the request was received or you showed evidence that you’ve met any requirements.

If you have a Federal Housing Administration (FHA) or Department of Veterans Affairs (VA) home loan, these rules do not apply to your situation. For FHA loans, mortgage insurance is for the life of the loan. With VA loans, the borrower’s entitlement, which provides for a no-money-down loan, essentially removes the 20% requirement to avoid PMI. If you have questions about FHA or VA loan mortgages and mortgage insurance, contact your servicer.

Can You Get a Home Equity Loan While You Pay PMI?

Yes, as long as home values have increased in your area, said Dale Robyn Siegel of Circle Mortgage Group in Harrison, New York. When applying for a home equity loan, the lender will appraise your home’s value in current market conditions. That value minus your existing mortgage provides an estimate of home equity or the portion you truly own. This is called loan-to-value (LTV).

In 2022, the most liberal lenders will give homeowners a home equity loan or credit line for up to 95% of the home’s current home value, said Cameron Cook, a broker with 19 years of experience in residential mortgages, now at C.S.I. Mortgage Design By Cameron in Lone Tree, Colorado. If you purchased the home within the past year or so, lenders could use the original purchase price.

Cook said that most banks stop at combined loan-to-value (CLTV) of 90% or less—this includes all liens combined. For example, you might have 80% in your first mortgage and 10% in a HELOC to create 90% CLTV. This differs from past years—in 2006, some banks would lend to 150%—although most banks lending at that percentage aren’t in business anymore, Cook said.

How a Home Equity Loan Affects Private Mortgage Insurance

A home equity loan can affect PMI in two different ways, based on the Homeowners Protection Act’s rights and responsibilities for both lender and homeowner. One thing to know upfront: After your PMI is canceled, it can’t be reinstated. This affords you the option of taking out a home equity loan without paying PMI on your first mortgage.

Home Equity Loans and PMI at 80% LTV

It’s possible to first request cancellation of  PMI when one of these two situations takes place: 

  • Date-based approach: The date arrives when your mortgage’s principal balance was originally scheduled to fall to 80% of the original value of your home based on your payment schedule.
  • Additional payment approach: You’ve made additional payments reducing the mortgage’s principal balance to 80% of the home’s original value before the planned date.

Calculations related to PMI cancellation are always based on the original home value, not the current market value of the home. To cancel PMI, you must make a request in writing, have a good mortgage payment history, and be current on your payments, although there may be other exceptions.

However, at 80%, your lender can require you to certify that your home doesn’t have what’s termed “junior liens,” which include a home equity loan, HELOC, or another second mortgage.

“Lenders have a certain amount of discretion as to whether they’ll allow someone to get rid of PMI,” Cook said. The HPA allows lenders the right to maintain PMI at 80% balance, and most lenders don’t allow removal, in Cook’s experience. “Each lender is a little different, but most lenders do follow HPA pretty closely,” Cook said.

This means you could ask to have PMI canceled, but the bank could say no. Even at an 80% loan balance, each lender has a different process for canceling PMI and may require an appraisal, Siegel said. An appraisal would note if your home’s value has dropped below the original value.

Siegel said that if you’ve taken out a HELOC or home equity line of credit, the unused balance counts as a second lien. Your HELOC could have a $0 line of credit balance, but your primary mortgage lender may consider the total amount available to you. After all, you could draw on the amount at any time, even five minutes after you asked for PMI cancellation.

If an appraisal or lien search is required by your lender, you will likely be responsible for any expenses.

Home Equity Loans and PMI at 78% LTV

“Generally, the HPA requires PMI to be terminated automatically on the ‘termination’ date, which is when the loan is first scheduled to hit 78% of the original home value, if the borrower is current on their mortgage on that date,” said Raul Cisneros, Public Affairs Specialist at the Consumer Financial Protection Bureau, by email. “Having a second lien does not impact a consumer’s right to automatic termination under the HPA.”

Unlike with 80% LTV, your home’s current property value doesn’t matter, even if it’s declined below the original value. However, you can’t fast-forward to 78% by making extra payments, as you can with 80% LTV described above. Instead, you must wait for the scheduled termination date for your loan note based on your normal amortization schedule, even if your LTV is already lower than 78%.

You could also qualify to have PMI end when you’re halfway through your loan’s full term, even if you haven’t yet reached 78% LTV, as long as you’re current on your monthly payments. This approach is seen more often with a balloon-payment mortgage, principal forbearance, or interest-only payment period.

Is a Home Equity Loan Worth It?

While a home equity loan can provide access to cash, it could hamper PMI cancellation until you reach the originally scheduled 78% LTV date. You may be paying your PMI for longer than you’d initially planned.

When a Home Equity Loan Is Worth It

A home equity loan may be worthwhile if your bank states in writing you can drop PMI at 80%, despite taking out a second lien. In some circumstances, a home equity loan may also be worth the PMI payments until the date you reach 78% LTV.

“Some people think they need a HELOC as a lifeline in case of emergency, and sometimes you do,“ Siegel said. “But other people get a home equity loan offer in the mail and wind up spending it on unnecessary toys or luxury vacations.” The latter isn’t a wise financial decision, especially when PMI removal is at stake.

When a Home Equity Loan Isn’t Worth It

If you’re on the brink of PMI cancellation at 80%, paying down your first mortgage and getting PMI canceled before clicking through the home equity loan application may be worth the effort.

If you intend to refinance, Siegel said you might wait to take out a home equity loan, as the second lien can complicate the refinancing process, especially if you want to keep the HELOC in place. This is called subordination and can lead to extra fees, delays, and paperwork.

Some borrowers have attempted to take out a home equity loan to pay down their mortgage, in an effort to be released from PMI. “It doesn’t work very well,” Cook said. “The homeowner can’t use the HELOC to pay down the first mortgage and get rid of the PMI.”

At 80%, the bank can choose to decline to remove PMI when it notes the new lien, Cook said. Even if a homeowner uses a loan to pay down a mortgage to 78%, PMI isn’t automatically canceled until you hit the original date according to the lender’s original amortization schedule—which may be more than several years away.

Alternatives to Home Equity Loans While Paying for PMI

If your home equity has gone up due to rising home prices, it may be possible to refinance your loan to access that equity. However, doing so when interest rates are rising, Siegel points out, could lead to a higher payment. If you’ve already taken out a home equity loan, you may also be able to refinance and roll both your primary and secondary mortgages into one new mortgage.

Even if you don’t take out a traditional home equity loan, using your home as collateral for any loan will likely act as a second lien and potentially damage your ability to remove PMI.

If you need cash for a renovation, Siegel recommended trying to borrow money from a family member or 401k, perform renovations, then get an appraisal to remove PMI based on the home’s new, higher value.

To get rid of PMI faster, you need to accelerate mortgage payments so you reach that magic number of 80%. Here are a few methods for knocking down debt:

  • Add extra money—whether birthday gift cash or your tax refund.
  • Divide one mortgage payment by 12, then add that amount to your monthly payment.
  • Send payments every two weeks instead of once a month, if your lender allows.

The Bottom Line

Your specific situation, state law, the housing market, or lender may have variables that change the equation. If you’re considering taking out a home equity loan, call your first lender and ask what the requirements or policies are regarding PMI cancellation, Cook said. If you decide to seek out a home equity line of credit, compare terms and weigh benefits against risks and total payments made over time.

 “Credit unions usually have more favorable terms for HELOCs these days,” Cook said. However, a mortgage broker or bank can also provide reasonable rates and repayment options.

Frequently Asked Questions (FAQs)

How do you get a home equity loan?

If your equity is 10% or greater, you can apply to lenders for a home equity loan and compare rates. Lenders will appraise your home and check your credit. However, you may be charged higher rates if you have bad credit.

How much can you borrow on a home equity loan?

The home equity loan amount possible to borrow depends on the lender’s standards. For the most part, if you’re already paying PMI, you could borrow 10%-15% of your equity. Some lenders set certain minimums and maximums for lending, such as between $35,000 and $150,000.

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Article Sources

  1. Consumer Financial Protection Bureau. “When Can I Remove Private Mortgage Insurance (PMI) From My Loan?

  2. FDIC. “FDIC Consumer Compliance Examination Manual: Homeowners Protection Act,” Page 2.

  3. U.S. Department of Veterans Affairs. “Purchase Loan.”