How Much Equity Do You Need to Remove PMI?

Private Mortgage Insurance (PMI) is an additional cost for homeowners. Lenders typically require PMI on conventional mortgages when a homebuyer makes a down payment of less than 20%. This insurance protects the lender if the borrower defaults. While the borrower pays the premium monthly, the coverage benefits the lender by mitigating risk from lower initial equity. Understanding how PMI functions and how to remove it is an important financial consideration for homeowners seeking to reduce monthly housing expenses.

PMI Removal Thresholds

Homeowners can remove Private Mortgage Insurance (PMI) through two primary pathways, each with distinct equity thresholds. One method is a borrower-initiated request, an option when the loan-to-value (LTV) ratio reaches 80% of the home’s original appraised value or sales price, whichever is less. To qualify, the homeowner must submit a formal request to their mortgage servicer and demonstrate a good payment history.

A separate and federally mandated process for PMI removal is automatic termination, governed by the Homeowners Protection Act (HPA) of 1998. This law requires lenders to automatically cancel PMI when the loan’s LTV ratio reaches 78% of the property’s original value, provided the mortgage account is current. This occurs without a specific homeowner request. The HPA also stipulates that PMI must terminate once the loan reaches the midpoint of its amortization schedule, regardless of the LTV, for certain loan types, assuming the borrower is current on payments.

Assessing Your Current Equity

Determining your current equity is the first step to understanding when you can remove PMI. This assessment begins with calculating your loan-to-value (LTV) ratio, found by dividing your current loan balance by your home’s current value. For instance, if your loan balance is $200,000 and your home value is $250,000, your LTV is 80%.

Find your current loan balance on your most recent mortgage statement or by contacting your loan servicer. The home’s value for PMI removal can be based on the original appraised value or sales price, used for the 80% and 78% thresholds. If you believe your home’s value has significantly increased, you may opt for a new appraisal. The lender requires this new appraisal to reflect current market value, and the homeowner bears the cost, typically $300 to $700.

While other valuation methods like comparative market analyses (CMAs) or online estimates provide an idea of value, only an official appraisal ordered through your lender or servicer is acceptable for PMI removal based on increased home value. Some lenders may also have seasoning requirements, such as owning the home for at least two years, before allowing a new appraisal.

Factors Influencing Equity Growth

Several factors contribute to a homeowner’s equity growth. One primary driver is the regular payment of your mortgage, specifically the portion applied to the principal balance. Each scheduled mortgage payment reduces the outstanding loan amount, directly increasing equity over time.

Making additional principal payments beyond the scheduled amount can accelerate equity growth. These extra payments directly reduce the loan balance, reducing interest accrual and accelerating equity accumulation. Another factor is an increase in the home’s market value due to market conditions. Even if the loan balance remains constant, a rise in value means the homeowner’s ownership stake has increased. Home improvements that add lasting value, such as a kitchen or bathroom remodel, can also contribute to a higher appraised value and greater equity.

Initiating the PMI Removal Process

Once you have assessed your equity and meet the required thresholds, contact your loan servicer to initiate the PMI removal process. This communication is key to understanding their specific procedures, as requirements can vary. They will provide a list of necessary documents and steps for a formal request.

The servicer will require a written request for PMI cancellation, along with confirmation of a good payment history (no 30-day late payments in the last 12 months and no 60-day late payments in the past 24 months). They may also require proof of no junior liens, like a second mortgage or home equity line of credit. If your request is based on an increased home value, the servicer will guide you through the appraisal process, involving an appraisal from an approved appraiser at your expense, typically $300 to $700. After submitting all required information and documentation, the servicer will review the request and notify you of their decision within 30 days. Upon approval, you will receive confirmation, and the PMI charge will be removed from your subsequent mortgage statements, reducing monthly housing costs.