How to Avoid or Cancel Private Mortgage Insurance

Private Mortgage Insurance (PMI) is an insurance policy protecting the lender, not the borrower, if a homeowner defaults on their mortgage. It is typically required when a borrower makes a down payment less than 20% of the home’s purchase price. PMI increases the overall monthly mortgage payment. Many homeowners seek to eliminate PMI because it is an additional expense that does not directly contribute to building home equity. This article explains strategies for avoiding PMI or removing it from an existing mortgage.

Understanding PMI Requirements

PMI is generally imposed on conventional mortgage loans when the loan-to-value (LTV) ratio exceeds 80%. This means PMI is likely required if a borrower finances more than 80% of the home’s appraised value or purchase price, whichever is lower. The cost of PMI is usually a monthly premium added to the homeowner’s regular mortgage payment, though it can also be an upfront premium or a combination of both.

While PMI applies to conventional loans, government-backed programs like those insured by the Federal Housing Administration (FHA) have their own mortgage insurance, known as Mortgage Insurance Premium (MIP). These are distinct from PMI and operate under different rules. For conventional loans, the Homeowners Protection Act (HPA) of 1998 provides guidelines for automatic termination and borrower-requested cancellation of PMI.

Initial Strategies to Bypass PMI

Prospective homeowners have several options to avoid paying PMI from the beginning. One method is to make a larger down payment. Putting down 20% or more of the home’s purchase price immediately lowers the loan-to-value ratio to 80% or below, eliminating the need for PMI. This also reduces the principal loan amount, leading to lower monthly mortgage payments and less interest paid over the loan’s life.

Another strategy involves using a “piggyback” loan, often structured as an 80/10/10 or 80/15/5 mortgage. In an 80/10/10 scenario, the first mortgage covers 80% of the home’s value, a second mortgage or home equity line of credit covers 10%, and the borrower provides a 10% down payment. This structure keeps the primary mortgage at or below the 80% LTV threshold, avoiding PMI on the larger loan. Borrowers should evaluate the interest rates and repayment terms of both loans, as the second loan typically carries a higher interest rate.

Lender-Paid PMI (LPMI) is an alternative where the lender covers the PMI premium. In exchange, the borrower typically accepts a slightly higher interest rate on the primary mortgage. While this eliminates a separate monthly PMI line item, the increased interest rate means the cost is effectively amortized over the loan’s life. Borrowers should compare the total cost of LPMI versus traditional borrower-paid PMI to determine which option is more financially advantageous.

Certain specialized loan programs also avoid PMI. VA loans, guaranteed by the U.S. Department of Veterans Affairs for eligible service members, veterans, and surviving spouses, generally do not require PMI regardless of the down payment. While these loans may include a funding fee, this fee is distinct from PMI and can often be financed into the loan amount.

Canceling PMI During Loan Term

For homeowners already paying PMI, several avenues exist to remove this expense. The Homeowners Protection Act (HPA) of 1998 mandates automatic termination of PMI for conventional loans. This occurs when the loan’s principal balance is scheduled to reach 78% of the home’s original value, based on the initial amortization schedule. The lender is responsible for tracking this threshold and terminating PMI once met, usually without homeowner action.

Borrowers can also request cancellation of PMI once their loan balance reaches 80% of the home’s original value. To initiate this, the homeowner must have a good payment history, with no payments 60 days or more past due in the past 12 months, and no subordinate liens. The borrower needs to contact their mortgage servicer to inquire about requirements for borrower-initiated cancellation. Servicers often require a formal written request and may ask for an updated appraisal to confirm the current market value, especially if the request is based on increased home value.

If cancellation is based on an increase in the home’s value, the mortgage servicer will require a new appraisal to establish the current market value. The cost of this appraisal, ranging from $300 to $600, is generally the homeowner’s responsibility. Once the appraisal confirms the loan-to-value ratio is 80% or lower based on current value, and all other conditions are met, the servicer processes the cancellation. The process, from request to PMI removal, can take several weeks, often within 30 to 45 days.

Refinancing the existing mortgage can also eliminate PMI. If the homeowner’s equity has grown sufficiently through principal payments or increased home value, a new loan can be originated with an LTV of 80% or less, avoiding PMI on the new mortgage. This involves applying for a new loan, undergoing a new appraisal, and completing the closing process. While effective, refinancing incurs closing costs, typically 2% to 5% of the new loan amount, which must be weighed against PMI savings.