Can Your Mortgage Insurance Be Cancelled?

Mortgage insurance is a common requirement for many homeowners, particularly those who make a down payment of less than 20% when purchasing a home. This insurance protects the lender against potential losses if a borrower defaults on their loan. Many homeowners wonder if this financial obligation can be removed from their monthly mortgage payments. Understanding the conditions for cancellation is important for borrowers seeking to reduce housing costs.

Understanding Mortgage Insurance Types

Mortgage insurance typically falls into two main categories: Private Mortgage Insurance (PMI) and FHA Mortgage Insurance Premium (MIP). Private Mortgage Insurance is generally associated with conventional loans, which are not backed by a government agency. FHA Mortgage Insurance Premium is required for loans insured by the Federal Housing Administration (FHA). These loans are designed to make homeownership more accessible, often allowing for lower down payments and more flexible credit requirements. The rules and conditions for cancelling these two distinct types of mortgage insurance vary, making it important to understand their differences.

Cancellation Criteria for Private Mortgage Insurance

Cancelling Private Mortgage Insurance (PMI) depends on meeting specific loan-to-value (LTV) thresholds and maintaining a good payment history. Under the Homeowners Protection Act (HPA) of 1998, lenders are required to automatically terminate PMI once the loan’s principal balance reaches 78% of the original home value. This automatic termination is based on the original amortization schedule, meaning it does not account for additional principal payments or market appreciation.

Borrowers can also proactively request PMI cancellation once their loan balance reaches 80% of the original home value. To qualify for this borrower-requested cancellation, a homeowner must typically demonstrate a strong payment history, which means no payments were 30 days or more past due in the 12 months preceding the request. Furthermore, there should be no payments 60 days or more past due within the 24 months before the cancellation request.

Current home value appreciation can impact eligibility for PMI cancellation. If the home’s value has increased, a new appraisal may be obtained at the homeowner’s expense to determine if the current LTV ratio, based on the appreciated value, is at or below the 80% threshold. The lender may also require that at least two years have passed since the loan origination.

Cancellation Procedures for Private Mortgage Insurance

Once eligibility for Private Mortgage Insurance (PMI) cancellation is met, homeowners initiate the process with their loan servicer. Contact the servicer directly to express the intent to cancel PMI. This communication can often be done by phone or through a written request.

The loan servicer will then typically provide a specific form or set of instructions for the PMI cancellation review. Homeowners will need to submit any required documentation, which often includes proof of their consistent payment history. If the cancellation is based on the current appreciated value of the home, the servicer will likely require a professional appraisal report to verify the updated loan-to-value ratio.

After receiving the necessary documents, the servicer will review the request against the established criteria. The review process can take several weeks, and the servicer will notify the homeowner of their decision in writing. If the cancellation is approved, PMI payments will cease, leading to a reduction in the homeowner’s monthly mortgage obligation.

Cancellation Rules for FHA Mortgage Insurance Premium

Cancelling FHA Mortgage Insurance Premium (MIP) generally follows different and often stricter rules compared to Private Mortgage Insurance. For FHA loans originated on or after June 3, 2013, the MIP requirements largely depend on the loan’s original loan-to-value (LTV) ratio. If the original LTV was 90% or less, the annual MIP may terminate after 11 years.

However, for FHA loans originated on or after June 3, 2013, with an original LTV greater than 90%, the annual MIP is typically required for the entire life of the loan. This means that for many borrowers, the MIP does not automatically cancel even after significant equity has been built. This policy contrasts sharply with PMI, which has clear termination points.

For FHA loans originated before June 3, 2013, the MIP may be cancellable after 11 years, provided the original LTV was below 90%. If the original LTV was 90% or greater, the MIP would be required for the life of the loan, similar to the post-2013 rules for higher LTVs. For many FHA borrowers, especially those with loans originated after the 2013 policy change, the most common method to remove MIP is to refinance their FHA loan into a conventional loan, assuming they now meet the conventional loan requirements and can avoid PMI with sufficient equity.