How to Calculate PMI Removal
Divide your loan balance by the home's original value. PMI ends once that ratio falls low enough.
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PMI isn't part of your homeowners policy
Private mortgage insurance is something your lender required because of how much you put down. It protects the lender if you stop paying the loan. It has nothing to do with the homeowners policy covering your house, which protects you if the house burns down or gets damaged. You'll keep paying both separately until PMI drops off, once your loan balance falls to the ratio your loan documents set. Your mortgage servicer can tell you the exact balance that triggers removal and when it happens automatically if you're current on payments. None of this changes what you need for closing. The lender still wants proof of a homeowners policy in place before you sign, regardless of PMI.
The policy you pick now is separate from PMI
PMI will drop off later based on your loan balance. What you pay for homeowners coverage is a separate cost you're choosing now, and it's worth checking before closing instead of after.
Getting the numbers right
The math behind PMI removal uses your original loan amount, not your current payoff balance and not your home's market value today. Divide what you currently owe by what the home was worth when you bought it, meaning the purchase price or appraised value used at closing, whichever your lender used to set up the loan. Your loan documents set the ratio where PMI drops off automatically, and a separate, slightly higher ratio where you can ask for removal sooner. Your servicer can tell you both numbers and where your loan currently stands against them.
Original value doesn't move once the loan is set up. If your home's market value rises after you buy it, that doesn't speed up PMI removal, since the ratio is based on what you paid, not what the house is worth now. Some lenders will recalculate using a new appraisal if you've made improvements or the market has moved a lot, but that's a request you make. It isn't something that happens on its own, so check your loan documents or ask your servicer which method applies to your loan.
Extra payments toward principal are the one thing you control that speeds this up. Every dollar that goes against the loan balance brings that ratio down faster than scheduled payments alone. If you're making extra principal payments, ask your servicer to recalculate the ratio periodically so you know how close you are, rather than waiting for the automatic cutoff to arrive on its own.
None of this affects what you're arranging for closing. The lender wants a homeowners policy in place regardless of PMI, and that policy is priced on your home's rebuilding cost, not its market value or your loan balance. The two numbers come from different calculations and move on different schedules. It's worth not confusing a lower PMI ratio with a lower insurance cost, since they aren't connected at all.
Does a bigger down payment mean cheaper homeowners insurance
No. How much you put down changes your loan amount and whether you carry PMI, but it doesn't touch what a homeowners policy costs. Your premium is priced on what it would take to rebuild the house if it were destroyed, plus the coverage you choose for your belongings, liability and the rest. Two buyers putting different amounts down on the same house get quoted the same premium, all else equal, because the insurer is pricing the structure, not the mortgage.
Rebuilding cost itself is worth understanding before closing, since it's easy to confuse with the purchase price. What you paid for the house reflects the lot, the location, what a buyer was willing to pay. What it costs to rebuild reflects materials and labor to reconstruct the structure at today's prices. These numbers can be far apart in either direction. A house on an expensive lot in a desirable area can cost less to rebuild than it sold for. An older house with detailed trim or a layout that's expensive to reproduce can cost more to rebuild than its sale price suggests.
Your dwelling coverage, the part of the policy that pays to rebuild, should match that rebuilding cost. It shouldn't match your loan amount and it shouldn't match the price on the purchase contract. Insurers typically use a calculation based on square footage, construction type, materials and local labor costs to arrive at a figure. Ask how that number was set rather than assuming it matches your purchase price. Underinsuring the dwelling is a problem you won't discover until you're filing a claim and finding the payout falls short of what rebuilding actually costs.
Your deductible is the other number worth getting right before closing. It's the part you pay out of pocket before coverage starts on a claim. A higher deductible lowers what you pay for the policy. A lower deductible raises it. The right balance depends on what you could cover yourself if something happened. Some policies also carry a separate, higher deductible just for wind or hail damage, common in states that see those storms. Your declarations page will list it separately if your policy has one.
Before you sign anything
Check how your dwelling coverage number was calculated, not what it happens to match. Ask whether it reflects rebuilding cost or the purchase price. Compare that figure against the quote before your closing date.
