Does PMI Go Down Over Time? How to Remove It

Private Mortgage Insurance (PMI) is an insurance policy designed to protect mortgage lenders from financial loss if a borrower defaults on their loan. It is typically required when a homebuyer makes a down payment of less than 20% of the home’s purchase price. Understanding how PMI works and when it can be eliminated is a significant financial consideration for homeowners.

What is Private Mortgage Insurance

PMI serves as a safeguard for lenders against increased risk from mortgage loans with lower borrower equity. When a down payment is less than 20%, the loan-to-value (LTV) ratio exceeds 80%, indicating a higher risk of default. PMI mitigates this risk for the lender, making it possible for individuals to purchase a home with a smaller upfront investment. Although it protects the lender, the borrower pays the cost of PMI.

Borrowers typically pay PMI as a monthly premium added to their mortgage payment. PMI can also be paid as a single upfront premium at closing, or through a combination of an upfront payment and lower monthly premiums. The specific structure often depends on the lender and the loan product. The loan-to-value (LTV) ratio, calculated by dividing the outstanding loan amount by the home’s appraised value, determines if PMI is required and is central to its removal.

Automatic Termination Requirements

The Homeowners Protection Act (HPA) of 1998 establishes guidelines for the automatic termination of Private Mortgage Insurance. Lenders are required to automatically cancel PMI when the loan-to-value (LTV) ratio reaches 78% of the home’s original value, provided the borrower is current on their mortgage payments. The original value is the lesser of the sales price or the appraised value at the time the loan was originated.

Automatic termination also occurs at the midpoint of a loan’s amortization schedule, even if the 78% LTV threshold has not yet been met. For instance, on a 30-year mortgage, PMI would automatically terminate at the 15-year mark, assuming the borrower remains current with their payments. The borrower must maintain a good payment history, without any 30-day late payments in the last 12 months or 60-day late payments in the last 24 months, for automatic termination to proceed.

How to Request Early Cancellation

Borrowers can request early cancellation of their Private Mortgage Insurance under the Homeowners Protection Act (HPA). This option becomes available when the loan-to-value (LTV) ratio, based on the original value of the home, reaches 80% of the original loan amount. To initiate this process, the borrower must submit a written request to their mortgage servicer.

Lenders require a good payment history for early cancellation, meaning no payments 30 days or more past due in the past 12 months, and no payments 60 days or more past due in the past 24 months. The property’s value must not have declined below its original appraised value. The lender may require a new appraisal, at the borrower’s expense, to verify the current market value of the property. This appraisal typically costs between $400 and $600.

If significant home improvements have increased the property’s value, this can facilitate an earlier cancellation request. The lender may consider the current appraised value for the LTV calculation in such instances, subject to lender-specific policies and federal guidelines. The property’s value must not have declined below its original value, and the home must be free of second mortgages or other liens.

Eliminating PMI Through Refinancing

Refinancing a mortgage presents another strategy for eliminating Private Mortgage Insurance. If the homeowner has accumulated at least 20% equity in their home, the new loan’s loan-to-value (LTV) ratio will be 80% or less, allowing the new mortgage to be originated without any PMI requirement. This approach can be appealing if current interest rates are lower than the original loan’s rate.

Before pursuing a refinance solely to remove PMI, borrowers should weigh the associated costs. Refinancing involves closing costs, which typically range from 2% to 5% of the new loan amount. These costs, including appraisal fees, origination fees, and title insurance, can offset the savings from eliminating PMI. A strong credit score is necessary to qualify for favorable new loan terms and interest rates.