How Much Equity Do You Need to Get Rid of PMI?

Private Mortgage Insurance (PMI) is often added to monthly mortgage payments for homeowners who make a down payment of less than 20% of the home’s purchase price. This insurance protects the mortgage lender if a borrower defaults on their loan. While PMI adds to the cost of homeownership, it is not a permanent fixture of a mortgage. Homeowners can remove this expense, reducing their monthly housing costs and increasing financial flexibility.

Understanding Private Mortgage Insurance

Private Mortgage Insurance is required for conventional loans when the down payment is below 20% of the home’s value. Its function is to protect lenders from losses if a borrower stops making payments. The presence of PMI allows lenders to approve loans for individuals who might not otherwise qualify, making homeownership more accessible.

PMI is most commonly paid as a monthly premium added to the mortgage payment. In some cases, it might be paid as a one-time upfront premium at closing, or a combination of both. It is distinct from other forms of mortgage insurance, such as the Mortgage Insurance Premium (MIP) for Federal Housing Administration (FHA) loans. Unlike some FHA MIPs, which may remain for the life of the loan, PMI has specific conditions for termination.

Automatic PMI Termination

The Homeowners Protection Act (HPA) of 1998 established rules for automatic PMI termination on conventional loans. For mortgages originated on or after July 29, 1999, lenders must automatically terminate PMI once the loan balance reaches 78% of the home’s original value. This original value is defined as the lesser of the sales price or the appraised value at the time the loan was consummated.

Automatic termination also applies if the loan reaches the midpoint of its amortization period, even if the 78% loan-to-value (LTV) ratio has not been achieved. For instance, on a 30-year mortgage, the midpoint would be reached after 15 years. For either scenario to trigger automatic termination, the borrower must be current on their mortgage payments. If the borrower is not current, termination will occur on the first day of the month after the mortgage becomes current.

Borrower-Requested PMI Cancellation

Homeowners can request PMI cancellation sooner than its automatic termination date. This becomes an option when the loan-to-value (LTV) ratio reaches 80% of the home’s original value. The “original value” refers to the lesser of the sales price or the appraised value at the time of loan closing, or the appraised value if the loan was a refinance.

To qualify for borrower-requested cancellation, several criteria apply. The borrower must demonstrate a good payment history, meaning no payments 30 days or more past due in the last 12 months, and no payments 60 days or more past due in the last 24 months. Additionally, the property’s value should not have declined below its original value, and there should be no subordinate liens that would impact the LTV calculation.

Equity in a home can be built in several ways, accelerating the path to PMI cancellation. Regular mortgage payments contribute to principal reduction, steadily increasing equity. Making additional principal payments can hasten this process, allowing the borrower to reach the 80% LTV threshold more quickly. If the property’s market value has appreciated since the loan was originated, this increase in value can also contribute to reaching the necessary equity, allowing for an earlier cancellation request.

The Process for Removing PMI

Once a homeowner believes they meet the eligibility criteria for PMI cancellation, contact your mortgage servicer. This communication should express interest in canceling PMI and inquire about specific procedures and required forms. Each servicer may have slight variations, so understanding their requirements is important.

The servicer will request documentation to verify eligibility, such as payment history and property details. If cancellation is based on an increase in the home’s value due to market appreciation or improvements, the servicer will require a new appraisal. This appraisal, which verifies the current market value and confirms the loan-to-value ratio, is typically arranged and paid for by the homeowner, with costs ranging from approximately $450 to $600.

After gathering necessary information and obtaining any required appraisals, submit your request to the mortgage servicer. This submission should include any specific forms provided by the servicer and the appraisal report, if applicable. Following submission, follow up with the servicer to monitor the request status and ensure the PMI removal process is progressing. Upon successful cancellation, you should receive a confirmation letter from the servicer, and future mortgage statements will reflect the absence of the PMI charge.