Saving for a deposit on a new home has become increasingly difficult. Recent figures show that 81% of prospective buyers in the United States believe that deposit and closing costs are the biggest barriers to home ownership. Traditionally, the advice has been to put down at least 20% of the property’s value. While this may sound old-fashioned, the benefits remain significant.
A larger deposit not only improves your chances of mortgage approval and lowers your interest rate, but it also reduces your monthly repayments. Most importantly, it allows you to avoid paying for private mortgage insurance (PMI).
PMI is an additional monthly charge, typically ranging between 0.46% and 1.50% of the total mortgage balance. It is designed to protect the lender if you default, not the borrower. Over the lifetime of a loan, these premiums can add up to thousands of pounds. Once you have built sufficient equity in your home, PMI should be cancelled automatically.
However, many homeowners discover they are still being charged even after reaching the 20% equity threshold. This makes it vital to understand your mortgage documents and track how each payment contributes to your equity. Acting promptly could save you considerable money.
Types of Mortgage Insurance
| Type of Insurance | Who Pays | How It Ends | Notes |
|---|---|---|---|
| Borrower-Paid Mortgage Insurance (BPMI) | Homeowner | Can request removal at 20% equity | Paid monthly via escrow |
| Lender-Paid Mortgage Insurance (LPMI) | Lender (cost passed on via higher interest rate) | Automatically removed at 22% equity | Requires refinancing to reduce rate |
| FHA Mortgage Insurance Premium (MIP) | Homeowner | Rules vary by loan date | For loans before June 2013: cancelled at 78% loan-to-value. For later loans: cancelled after 11 years if deposit ≥10%; otherwise payable for life of loan |
FHA Loans
Federal Housing Administration (FHA) loans are popular among first-time buyers because they require smaller deposits. However, they come with MIP, which can be more restrictive than PMI. Depending on when your loan was issued, you may be required to pay MIP for the lifetime of the mortgage unless you refinance into a conventional loan. Refinancing can be costly and time-consuming, so it is important to calculate whether the savings outweigh the fees.
How to Cancel PMI
If you are below the 20% equity threshold, making extra payments (if permitted by your lender) can help you reach it sooner. Once you have achieved 20% equity, you can submit a written request to your mortgage servicer to cancel PMI.
You may be asked to provide a current property valuation to confirm that your home has not lost value. In addition, you must demonstrate a reliable payment history with no missed instalments and ensure there are no outstanding liens on the property.
After submitting your request, monitor your mortgage statements carefully to confirm that the insurance charge has been removed. This simple step could reduce your monthly bill almost immediately, freeing up money for savings or other expenses.