Do you have to buy PMI when you get a home equity loan?

When you’re ready to take on a big financial goal, thinking ahead is a great approach. The more you understand about your choices, the better prepared you’ll be to make decisions that are right for your situation. The efforts you make to plan carefully now could pay off for years to come.

Home equity loans are mortgages, and PMI is a legitimate concern in the world of home loans. Getting a home equity loan won’t trigger PMI, but there are situations when the two cross paths. Here are the details you need to know. 

Is PMI required when you get a home equity loan? 

The short answer is no, PMI isn't something most homeowners need to worry about when they consider a home equity loan. 

Private mortgage insurance (PMI) is required when you get a mortgage with a down payment of less than 20%.

In this case, your loan-to-value (LTV) ratio would be higher than 80%. LTV is how much you owe compared to the value of the home. The opposite of LTV is equity—your home’s value minus the amount you still owe on it. If your LTV is 80%, your equity is 20%.  

PMI protects your lender if you stop making payments on your mortgage, and it’s required on most conventional mortgages until you have at least 20% equity. 

Can you get a HELOC if you’re still paying PMI?

In some cases, yes, you can apply for a HELOC even if you’re still paying PMI, depending on the lender and your LTV. But it’s not a typical situation. With a higher starting LTV, there isn’t much room to borrow more.

When you want a home equity loan, the lender will look at your CLTV, which stands for combined LTV. CLTV is your mortgage balance plus the new loan you want, compared to your home’s value. If the lender’s CLTV limit is 80%, that means your mortgage and home equity loan combined may be up to 80% of your home’s value. 

If you’re still paying PMI because you don’t have 20% equity yet, you won’t qualify for a home equity loan from a lender with an 80% CLTV limit.

If the lender’s CLTV limit is higher than 80%, you might qualify to borrow more. Here’s an example of how it could look: 

How does a HELOC impact PMI on your first mortgage? 

If you’ve already had PMI canceled on your first mortgage, borrowing against your equity won’t bring it back.

If you have less than 20% equity in your home and are still paying for PMI, getting a home equity loan won’t impact those payments.

Once your mortgage balance drops to 80% of your home’s value, you can apply to end your PMI payments. This is true even if you also have a home equity loan that you’re still paying off. But if you have a home equity loan, the lender might not agree. Even so, the law requires them to cancel PMI when the LTV on your primary mortgage drops to 78%. 

How do you get rid of PMI? 

You have two options to get rid of PMI on your mortgage. 

When is PMI automatically canceled?

If you have a conventional mortgage, your lender is required to cancel your PMI once you reach 78% LTV ratio. As long as you’re current on your payments, it should happen on the date that your principal balance reaches 78% of the home’s purchase price. 

Let’s say you bought a $300,000 home with 10% down, or $30,000. You’ve borrowed $270,000, and once you’ve paid your loan balance down to $234,000, your LTV ratio will be 78%.   

How do you request PMI cancelation?

If you don’t want to wait for your PMI to be canceled automatically, you can contact your lender to request PMI cancellation once your LTV ratio reaches 80%. This could be because you’ve made enough regular (or extra) mortgage payments to get there, or because your home’s value has increased since you bought it, or a combination of the two. If you’re making the case that your home is worth more now, your lender may require an appraisal to confirm it. 

What’s next:

There are several great ways to use a home equity loan or line or credit. For example, you could consolidate debt or pay for improvements to your home. If you’re interested in getting a home equity loan, do some digging to learn the status of your LTV ratio. It’s easy—log into your mortgage account (or check your most recent paper statement) to find your loan’s current principal balance. Then divide your current balance by the amount you paid for the home. Multiply by 100 to get your LTV ratio. 

Example:

• Your mortgage balance is $395,000.

• Your home is worth $500,000.

• 395,000 / 500,000 = 0.79

• 0.79 x 100 = 79 (your LTV)

If you’re closing in on 80%, contact your lender to find out what steps you could take to make sure your PMI is removed as soon as possible.  

Being able to take out a home equity loan or HELOC is one big advantage of owning a home. By learning more about how your loan-to-value ratio impacts PMI, you’ll become a more well-informed borrower.