Does PMI Come Out of Escrow? And How to Stop Paying It

A mortgage payment includes several financial components beyond just repaying the loan. These typically include the principal loan amount, interest, property taxes, and homeowner’s insurance. Each part plays a role in the overall cost of homeownership. Understanding how these elements are managed is important for any homeowner.

What is Private Mortgage Insurance

Private Mortgage Insurance (PMI) protects the mortgage lender if a borrower defaults on their loan. Lenders typically require PMI when a homebuyer makes a down payment of less than 20% of the home’s purchase price, resulting in a loan-to-value (LTV) ratio greater than 80%. For example, on a $400,000 home, a down payment less than $80,000 would generally trigger PMI.

PMI differs from homeowner’s insurance, which protects the homeowner and their property from damage or loss. While homeowner’s insurance is almost universally required by lenders, PMI is specifically tied to the equity a homeowner has in their property. It helps cover potential losses for the lender if a foreclosure occurs and the property sale does not cover the outstanding loan balance.

How Mortgage Escrow Accounts Work

A mortgage escrow account functions as a dedicated holding account managed by your mortgage servicer. This account collects a portion of your monthly mortgage payment to cover specific property-related expenses. The most common components funded through an escrow account are property taxes and homeowner’s insurance premiums.

Each month, your mortgage servicer deposits a calculated amount into this escrow account. When property tax bills or homeowner’s insurance premiums become due, the servicer disburses the necessary funds from the escrow account on your behalf. This arrangement offers convenience to homeowners by consolidating these recurring, often large, expenses into manageable monthly payments. For lenders, escrow accounts ensure that obligations like taxes and insurance are paid promptly, protecting their collateral.

PMI and Your Escrow Account

While Private Mortgage Insurance (PMI) is a distinct charge, it is typically integrated into your overall monthly mortgage payment. Your monthly payment to the lender includes the principal, interest, property taxes, homeowner’s insurance, and PMI. The lender then manages the disbursement of these funds.

The portion of your payment designated for PMI is often handled through the same mechanism as your property taxes and homeowner’s insurance. The lender collects this amount and holds it, frequently within the broader escrow framework, before remitting it to the PMI provider. Thus, PMI is usually collected as part of the total bundled payment that the lender manages, often through an escrow account.

Ending Private Mortgage Insurance

Homeowners typically have several avenues to cease paying Private Mortgage Insurance (PMI). The Homeowners Protection Act (HPA) of 1998 provides specific guidelines for the termination of PMI on conventional loans.

One primary method is automatic termination, which occurs when your loan’s principal balance is scheduled to reach 78% of the home’s original value. This automatic cancellation is mandated by the HPA, provided the loan is current. PMI must also be automatically terminated at the midpoint of the loan’s amortization schedule, even if the 78% loan-to-value (LTV) ratio has not yet been met, assuming the borrower is current on payments.

Borrowers can also request PMI cancellation once their loan balance reaches 80% of the home’s original value. To initiate this, homeowners must submit a written request to their mortgage servicer, maintain a good payment history, and ensure there are no subordinate liens on the property. Lenders may require an appraisal to verify the current property value, especially if the homeowner believes appreciation has increased their equity. Making additional principal payments can accelerate the process of reaching these 80% or 78% LTV thresholds, allowing for earlier PMI removal.