How Do You Get PMI Off Your Mortgage?

Private Mortgage Insurance (PMI) is a type of insurance lenders typically require when a homebuyer makes a down payment of less than 20% on a conventional mortgage. This insurance protects the lender, not the borrower, if the borrower defaults on the loan. While it adds to the monthly housing cost, PMI can enable borrowers to qualify for a mortgage they might otherwise not obtain. This article explains how homeowners can remove PMI, potentially reducing their monthly payments.

Understanding Private Mortgage Insurance

Private Mortgage Insurance protects mortgage lenders against losses if a borrower defaults on a conventional loan. Lenders usually require PMI when the loan-to-value (LTV) ratio of a mortgage exceeds 80%, meaning the borrower’s equity in the home is less than 20% of its value at loan origination. This requirement helps mitigate the lender’s risk with lower down payments.

The most common form of PMI is Borrower-Paid PMI (BPMI), where the cost is added to the homeowner’s monthly mortgage payment. Another type is Lender-Paid PMI (LPMI), which typically results in a slightly higher interest rate, but without a separate monthly PMI payment. For homeowners seeking to reduce their monthly outlays, the focus is generally on removing BPMI, as LPMI is embedded in the interest rate and not cancellable in the same manner.

Automatic Termination of PMI

Federal law, the Homeowners Protection Act (HPA) of 1998, provides rights for homeowners for PMI termination. This act mandates automatic termination of PMI for many conventional loans once certain conditions are met, even if the homeowner does not actively request it.

PMI must automatically terminate when the principal balance of the mortgage is scheduled to reach 78% of the original value of the home. This calculation is based on the loan’s original amortization schedule, with termination occurring provided the loan is current on payments. The “original value” refers to the lesser of the sales price or the appraised value at loan origination.

For some loans, the HPA also stipulates a “midpoint termination.” If PMI has not been cancelled, it must automatically end on the first day of the month following the midpoint of the loan’s amortization period. This applies even if the 78% LTV threshold has not been reached, as long as the borrower is current on payments. Mortgage servicers are required to provide annual statements about PMI and notify borrowers when their PMI is scheduled to terminate.

Requesting PMI Cancellation

Homeowners can proactively request PMI cancellation once their mortgage balance reaches 80% of the home’s original value. This is distinct from the 78% automatic termination and allows for earlier removal if the borrower pays down the loan faster than scheduled. The “original value” refers to the lesser of the sales price or appraised value at purchase, or the appraised value if the loan was a refinance.

To initiate a cancellation request, homeowners need to meet specific criteria set by their lender. A good payment history is required, meaning no 30-day late payments in the last 12 to 24 months, and no 60-day late payments in the past year. Lenders also commonly require certification that there are no junior liens, such as a second mortgage or home equity line of credit, on the property.

Lenders may require a new appraisal if the home’s value has increased significantly, enabling them to reach the 80% LTV threshold sooner based on current market value. This appraisal helps confirm the property’s current value. The cost of this appraisal is typically borne by the homeowner.

Once the eligibility criteria are met, the homeowner should contact their mortgage servicer to begin the cancellation process. This involves submitting a written request and providing any required documentation, such as proof of good payment history or a new appraisal report. The servicer will review the request and notify the homeowner of their decision.

Other Strategies for PMI Removal

Beyond automatic termination and direct cancellation requests, homeowners have alternative strategies for removing PMI. Refinancing the mortgage can effectively eliminate PMI, particularly if the home’s value has increased or the loan balance has significantly decreased. By refinancing into a new loan with an LTV of 80% or less, based on a current appraisal, the PMI requirement can be avoided. This approach, however, involves closing costs and potentially a new interest rate, which should be carefully weighed against the savings from PMI removal.

Making additional principal payments is another strategy that directly accelerates the reduction of the loan balance. Consistently paying more than the minimum monthly principal amount helps the homeowner reach the 80% (or 78%) LTV threshold sooner. This proactive approach can shorten the time frame for PMI termination or cancellation eligibility, leading to earlier savings on monthly housing costs.

The rules for Private Mortgage Insurance primarily apply to conventional loans. Other types of loans, such as those backed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA), have different insurance requirements. FHA loans, for instance, require a Mortgage Insurance Premium (MIP), which often lasts for the life of the loan or for 11 years, depending on the loan’s terms and down payment. VA loans typically do not require PMI or MIP, offering a distinct benefit to eligible service members and veterans.