How to Get Rid of PMI Insurance From Your Mortgage

Private Mortgage Insurance (PMI) is an insurance policy often required for homeowners who secure a conventional mortgage with a down payment less than 20% of the home’s purchase price. It safeguards the lender against potential losses if the borrower defaults, rather than protecting the homeowner. Lenders typically view loans with lower down payments as carrying increased risk, and PMI helps mitigate this exposure. The annual cost of PMI generally ranges from 0.5% to 1% of the original loan amount, added to the monthly mortgage payment.

Automatic PMI Cancellation

The Homeowners Protection Act (HPA) establishes specific conditions under which private mortgage insurance must be automatically terminated by the mortgage servicer. This automatic cancellation occurs when the loan-to-value (LTV) ratio reaches 78% of the property’s original value. The original value is typically defined as the lesser of the home’s purchase price or its appraised value at loan origination.

For this automatic termination to take effect, the borrower must be current on their mortgage payments. The HPA also mandates that PMI must be terminated by the first day of the month following the midpoint of the loan’s amortization period, provided the borrower is current on payments at that time. This provision serves as a final safeguard for termination, even if the 78% LTV threshold has not yet been met.

These automatic cancellation rules apply to conventional loans and are based on the original value of the property, not any subsequent appreciation. The mortgage servicer is responsible for tracking these thresholds and initiating the cancellation without requiring action from the homeowner. Borrowers should still monitor their loan balance to ensure timely termination.

Requesting PMI Cancellation

Homeowners can proactively request PMI cancellation before automatic termination occurs. This borrower-initiated cancellation is typically possible once the loan-to-value (LTV) ratio reaches 80% of the property’s original value.

For this request to be granted, lenders generally require the homeowner to have a good payment history. This means no 30-day late payments in the past 12 months and no 60-day late payments in the past 24 months. The property’s value should also not have declined below its original value, and there should be no subordinate liens affecting the lender’s equity position.

If the home has significantly appreciated or substantial improvements have been made, lenders may allow cancellation based on the current appraised value. This often requires the homeowner to pay for a new appraisal to verify the updated property value. Lenders may also have “seasoning” requirements, such as owning the home for at least two years with a 75% LTV, or five years with an 80% LTV, to consider current value for cancellation.

Using Refinancing to Eliminate PMI

Refinancing a mortgage can be an effective strategy for homeowners seeking to eliminate Private Mortgage Insurance. This process involves obtaining a new mortgage loan to replace the existing one. If the new loan’s loan-to-value (LTV) ratio is 80% or less, based on the home’s current appraised value, the new loan will typically not require PMI.

The current market value of the home is determined through a new appraisal conducted as part of the refinancing process. This can be particularly advantageous if the property has significantly appreciated in value since the original purchase. However, refinancing involves closing costs, which can range from 2% to 5% of the new loan amount.

These costs include fees for appraisals, credit checks, and title services. Homeowners should carefully evaluate these upfront expenses against the potential monthly savings from eliminating PMI to determine a break-even point. Refinancing also provides an opportunity to secure a lower interest rate if market conditions are favorable, potentially leading to additional long-term savings beyond just the removal of PMI.

FHA Mortgage Insurance Premiums

Federal Housing Administration (FHA) loans have their own form of mortgage insurance, known as Mortgage Insurance Premiums (MIP), which operates differently from conventional Private Mortgage Insurance (PMI). FHA loans require both an Upfront Mortgage Insurance Premium (UFMIP) and an Annual Mortgage Insurance Premium (MIP). The UFMIP is a one-time fee, typically 1.75% of the loan amount, which can be paid at closing or financed into the loan.

The rules for canceling the annual MIP depend on when the FHA loan was originated and the initial down payment amount. For FHA loans originated on or after June 3, 2013, the annual MIP can be removed after 11 years if the original down payment was at least 10%. However, if the down payment was less than 10%, the annual MIP is generally required for the entire life of the loan.

For FHA loans originated before June 3, 2013, the MIP typically cancels once the loan-to-value (LTV) ratio reaches 78%, or after 5 years, depending on specific loan terms and the original down payment. For many current FHA loan holders, especially those with less than a 10% down payment, the only way to eliminate the ongoing MIP payment is to refinance the FHA loan into a conventional mortgage once sufficient equity has been established.