How to Calculate When You Can Remove PMI

Private Mortgage Insurance (PMI) is a type of mortgage insurance required with conventional loans when a homebuyer makes a down payment of less than 20% of the home’s value. It primarily protects the lender, not the homeowner, against potential losses if the borrower defaults on the mortgage. While PMI allows many individuals to achieve homeownership sooner by requiring a smaller upfront investment, it adds an additional cost to the monthly mortgage payment. Removing this expense can lead to significant long-term savings for homeowners.

Understanding PMI Removal Criteria

The ability to remove Private Mortgage Insurance is governed by specific conditions, largely influenced by the Homeowners Protection Act (HPA) of 1998, also known as the PMI Cancellation Act. This federal law establishes clear guidelines for both borrower-requested cancellation and automatic termination of PMI. The HPA applies to private, residential mortgages on single-family primary residences.

Borrowers can request PMI cancellation once their loan’s principal balance reaches 80% of the home’s original value. “Original value” is typically defined as the lesser of the contract sales price or the appraised value at the time of purchase.

Beyond borrower requests, the HPA also mandates automatic PMI termination. This occurs when the loan’s principal balance is first scheduled to reach 78% of the original value of the mortgaged property. This automatic termination happens regardless of whether the borrower has made extra payments, provided the loan is current. Furthermore, PMI must also be terminated by the midpoint of the loan’s amortization period, even if the 78% loan-to-value (LTV) threshold has not been met, assuming the borrower is current on payments.

Calculating Eligibility for Removal

Determining eligibility for PMI removal requires calculating your loan-to-value (LTV) ratio, which compares your current loan balance to your home’s current market value. First, identify your current outstanding principal balance. This information is available on your monthly mortgage statement, through your lender’s online banking portal, or by contacting your loan servicer.

Next, establish the current market value of your home. While online tools may offer estimates, lenders typically require a professional appraisal for borrower-initiated PMI removal requests. An appraisal provides an independent, expert valuation of your property based on its condition, features, and comparable sales. Appraisal costs typically range from $300 to $700 and can take one to four weeks.

Once you have both figures, calculate the LTV using the formula: (Current Loan Balance / Current Property Value) x 100 = Current LTV (%). For instance, if your current loan balance is $200,000 and your home’s appraised value is $250,000, your LTV would be ($200,000 / $250,000) x 100 = 80%. A lower LTV indicates greater equity, bringing you closer to PMI removal.

Lenders require a good payment history: 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. The property must also be free of junior liens, such as second mortgages or home equity lines of credit. You can request your payment history directly from your loan servicer to verify this.

Initiating the Removal Process

Once you have calculated your eligibility and gathered all necessary information, contact your mortgage loan servicer to initiate the PMI removal process. Many servicers have specific forms or procedures for this request, which they can provide.

When submitting your request, provide supporting documentation. This typically includes the professional appraisal report, which substantiates your home’s current market value. You will also need to include a written request letter, proof of your good payment history, and a certification that there are no junior liens on the property. It is important to submit all required documents simultaneously to prevent delays.

After your request is submitted, the loan servicer will review the information to confirm it meets the criteria for PMI removal. Servicers are obligated to process requests promptly. If approved, the servicer will communicate their decision and outline when PMI payments will cease. Servicers typically cease collecting PMI premiums within a reasonable timeframe, often within 30 days following the termination date. Should your request be denied, the servicer must provide a reason for the denial, allowing you to address any issues or understand when you might become eligible in the future.