How to Cancel Mortgage Insurance

Mortgage insurance, while often a requirement when purchasing a home, does not necessarily last for the entire duration of a mortgage. This insurance, designed to protect the lender in case a borrower defaults, can represent a significant ongoing cost for homeowners. Understanding the conditions under which this expense can be eliminated can lead to notable savings over the life of a loan.

Understanding Mortgage Insurance Cancellation Requirements

The ability to cancel mortgage insurance depends on the loan type: Private Mortgage Insurance (PMI) for conventional loans or Mortgage Insurance Premium (MIP) for FHA-backed loans. These two types have distinct rules and eligibility criteria for cancellation, governed by federal regulations like the Homeowners Protection Act of 1998 (HPA) for PMI.

For conventional loans, Private Mortgage Insurance (PMI) can be removed through two avenues. The first is automatic termination, mandated by the HPA for loans closed on or after July 29, 1999. PMI automatically ceases when the loan’s principal balance reaches 78% of the home’s original value, based on the initial amortization schedule, provided the borrower is current on payments. Original value is the lesser of the sales price or the appraised value at purchase.

The second method for PMI removal is borrower-initiated cancellation, which can occur earlier. A homeowner can request cancellation when the loan-to-value (LTV) ratio reaches 80% of the home’s original value. LTV is calculated by dividing the outstanding loan balance by the property’s value. A good payment history is required, 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. The property must also be free of any second liens, such as a home equity loan or line of credit.

If the home’s value has increased due to market appreciation or improvements, borrowers may cancel PMI based on the current appraised value. The loan servicer may require a new appraisal to confirm the increased value, with the cost borne by the homeowner. Appraisal costs range from $400 to $700, depending on location and property specifics.

Mortgage Insurance Premium (MIP) for FHA loans follows different, more restrictive rules. For FHA loans originated on or after June 3, 2013, cancellation depends on the initial loan-to-value ratio (LTV) or down payment. If the initial LTV was 90% or greater (down payment less than 10%), MIP is required for the entire loan life.

For FHA loans originated on or after June 3, 2013, with an initial LTV less than 90% (a down payment of 10% or more), MIP may be removed after 11 years of on-time payments. For FHA loans originated between January 2001 and June 3, 2013, MIP could be automatically canceled once the borrower achieved 22% equity (LTV of 78%) and made payments for at least five years. Many FHA borrowers eliminate MIP by refinancing into a conventional loan once they have built sufficient equity.

The Process for Requesting Cancellation

After determining eligibility, homeowners initiate a formal request with their loan servicer. The loan servicer, not always the original lender, is the primary contact for mortgage inquiries, including cancellation. Homeowners can contact their servicer by phone, written letter, or online portal to inquire about the process and requirements.

A formal written request is required to begin the cancellation process. This request should include the loan number, property address, and a clear statement of the desire to cancel mortgage insurance. Retain copies of all correspondence for personal records.

The servicer will request documentation to verify eligibility criteria. This includes proof of a good payment history (consistent on-time payments) and details from original loan documents. If cancellation is based on increased home value, the servicer will require a new property appraisal. The homeowner is responsible for ordering and paying for this appraisal, which can take weeks to complete.

After submitting the request and documentation, the loan servicer will review the information. Servicers respond within a few business days regarding initial eligibility, but if an appraisal is necessary, the process can extend. Once conditions are met and approved, mortgage insurance removal takes between five business days and 30 days to process, after which the homeowner’s monthly payment will be adjusted.

If a cancellation request is denied, the servicer must provide a specific reason. Understanding this reason is important, as it may indicate further steps needed to meet eligibility criteria or if reapplying later would be beneficial. For instance, a denial might be due to an insufficient LTV ratio, a recent late payment, or an outstanding second lien.