How to Avoid Paying Mortgage Insurance

Mortgage insurance serves as a protective measure for lenders against financial loss if a borrower defaults on their loan. This insurance typically becomes a requirement when a borrower makes a down payment of less than 20% of the home’s purchase price, representing a higher perceived risk to the lender. For conventional loans, this is known as Private Mortgage Insurance (PMI), while for loans insured by the Federal Housing Administration (FHA), it is referred to as Mortgage Insurance Premium (MIP).

Avoiding Mortgage Insurance at Loan Origination

Borrowers can implement several strategies at the outset of their mortgage application to avoid incurring mortgage insurance obligations. One direct approach involves making a substantial down payment on a conventional loan. When a borrower contributes 20% or more of the home’s purchase price as a down payment, the loan-to-value (LTV) ratio falls to 80% or less, which typically alleviates the lender’s requirement for PMI. This larger upfront investment reduces the lender’s risk exposure, making mortgage insurance unnecessary for the loan.

Another method to avoid a separate monthly PMI payment is through Lender-Paid Mortgage Insurance (LPMI). In an LPMI arrangement, the lender covers the mortgage insurance premium, but this cost is integrated into the loan through a slightly higher interest rate. While the borrower does not see a distinct line item for PMI on their monthly statement, the underlying cost is spread across the loan’s lifetime in the form of increased interest payments. This structure can simplify monthly budgeting by eliminating an additional payment, though it results in a higher overall cost of borrowing.

“Piggyback” loans offer a strategic way to avoid mortgage insurance by combining multiple loans at the time of purchase. A common structure, often called an 80/10/10 loan, involves a first mortgage covering 80% of the home’s value, a second mortgage (often a home equity line of credit or HELOC) covering 10%, and the borrower contributing a 10% down payment. Other variations, such as an 80/15/5 structure, follow the same principle to keep the primary loan’s LTV below the threshold for mortgage insurance.

Loans guaranteed by the U.S. Department of Veterans Affairs (VA loans) do not require mortgage insurance. These loans are available to eligible service members, veterans, and surviving spouses. While VA loans do not have mortgage insurance, they do include a one-time VA funding fee, which can be paid upfront or financed into the loan amount. This fee is a distinct charge from mortgage insurance.

Loans backed by the U.S. Department of Agriculture (USDA loans) do not require mortgage insurance premiums. Instead, USDA loans involve an upfront guarantee fee and an annual guarantee fee, both calculated as a percentage of the loan amount. These fees are separate from the conventional or FHA mortgage insurance requirements.

Eliminating Mortgage Insurance After Loan Origination

The Homeowners Protection Act (HPA) provides for the automatic termination of Private Mortgage Insurance (PMI) for conventional loans. Under the HPA, a lender or loan servicer must automatically cancel PMI on the date when the principal balance of the mortgage is scheduled to reach 78% of the original value of the property, based on the initial amortization schedule. This termination occurs automatically, provided the borrower is current on their mortgage payments.

Borrowers can also proactively request the cancellation of PMI once their equity in the home reaches 20% of the original purchase price or appraised value. This borrower-initiated cancellation is typically permitted when the loan-to-value (LTV) ratio reaches 80%. To qualify, borrowers generally need to demonstrate a good payment history. Additionally, the property may need to be free of subordinate liens, such as second mortgages or home equity lines of credit, that could affect the LTV calculation.

Initiating the cancellation process involves contacting the loan servicer in writing to request PMI removal. The servicer may require a new appraisal to confirm the current market value of the home, especially if the request is based on an increase in property value rather than just principal reduction. The cost of this appraisal is typically borne by the borrower. Upon verification of the 80% LTV threshold and other conditions, the servicer will then cease collecting PMI payments.

Refinancing an existing mortgage offers another viable strategy for eliminating mortgage insurance. If a homeowner has accumulated sufficient equity in their property, they can apply for a new mortgage that has a loan-to-value (LTV) ratio of 80% or less. The new loan effectively replaces the old one, and because the LTV meets the threshold, the new mortgage will not require PMI. This approach can be particularly beneficial if current interest rates are lower than the original loan’s rate, offering both PMI elimination and potential interest savings.

Making additional principal payments on a mortgage can accelerate the rate at which a homeowner builds equity, thereby speeding up the elimination of mortgage insurance. By paying down the loan balance faster than scheduled, borrowers can reach the 80% LTV threshold for borrower-initiated cancellation or the 78% LTV for automatic termination sooner.

An increase in the home’s market value can significantly contribute to reaching the necessary equity threshold for PMI removal. If property values in an area have appreciated since the home was purchased, the homeowner’s equity may have grown even without substantial principal payments. In such cases, a new appraisal can be obtained to reflect the current, higher market value of the property. This updated valuation can demonstrate that the loan-to-value ratio has fallen to 80% or below, allowing the borrower to request the cancellation of PMI based on increased equity.