How to Get Out of PMI on Your Mortgage

Private Mortgage Insurance (PMI) is a financial product designed to protect mortgage lenders, not borrowers. It applies to conventional mortgages when a borrower’s down payment is less than 20% of the home’s purchase price. This insurance mitigates the lender’s risk if the borrower defaults on the loan. PMI premiums are added to the borrower’s monthly mortgage payment.

Automatic PMI Termination

The Homeowners Protection Act (HPA) of 1998 mandates that lenders automatically terminate PMI for residential mortgages once specific conditions are met. This applies to loans closed on or after July 29, 1999. The primary condition for automatic termination is when the loan’s principal balance is scheduled to reach 78% of the property’s original value.

Another provision for automatic termination occurs at the midpoint of the loan’s amortization period. For instance, on a 30-year mortgage, this would be after 15 years. For both conditions, the borrower must be current on their mortgage payments for the termination to occur on schedule. If not, the PMI will be terminated on the first day of the month after the loan becomes current.

Lenders are legally obligated to terminate PMI once these criteria are fulfilled, and borrowers do not need to take any action. The lender should provide notification once the PMI has been terminated.

Borrower-Requested PMI Cancellation

Borrowers can actively request PMI cancellation once their loan-to-value (LTV) ratio reaches 80% of the property’s original value. The “original value” refers to the lesser of the sales price or the appraised value at the time the loan was first obtained. If the loan was a refinance, the original value is the appraised value at the time of refinancing.

A requirement for borrower-requested cancellation is a good payment history. This means 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. Additionally, lenders may require certification that there are no subordinate liens, such as a second mortgage or home equity line of credit, on the property.

Lenders might also require an appraisal to confirm the property’s current value has not declined below its original value. The borrower is responsible for the cost of this appraisal. To initiate the process, the borrower should contact their loan servicer in writing, providing their loan number and requesting PMI cancellation. The servicer will then review the request, potentially order an appraisal, and notify the borrower of the decision, with PMI payments ceasing if approved.

Refinancing to Remove PMI

Refinancing presents another avenue for eliminating Private Mortgage Insurance, distinct from the automatic or borrower-initiated cancellation processes. This method involves replacing the existing mortgage with a new one. For PMI to be avoided on the new loan, the new loan’s loan-to-value (LTV) ratio, based on the property’s current appraised value, must be 80% or lower.

The refinancing process begins with researching and comparing loan products from various lenders to find one that meets the LTV requirement and offers favorable terms. Applying for a new mortgage requires providing financial documentation, similar to the original home purchase. Lenders will assess creditworthiness through a credit check and evaluate income stability and debt-to-income ratios.

A new appraisal of the property is a standard part of the refinancing process, as it determines the current market value used to calculate the new LTV. This step confirms that the equity threshold for PMI removal is met. The new loan then proceeds through underwriting, where the lender verifies all information and approves the loan. Closing on the new loan involves signing numerous documents and paying closing costs, which range from 2% to 6% of the new loan amount, potentially thousands of dollars. Once the new loan closes, it pays off the old mortgage, and if the LTV requirements are satisfied, the new loan will not include PMI.