How to Get Rid of PMI on a Conventional Loan

Private Mortgage Insurance (PMI) is a common component of conventional mortgages, particularly when a borrower makes a down payment of less than 20% of the home’s purchase price. This insurance policy safeguards the lender against potential losses if a borrower defaults on their loan. While PMI offers this protection, it represents an additional monthly expense for the homeowner that does not contribute to building equity in the property.

Automatic Termination of PMI

The Homeowners Protection Act (HPA) governs the automatic termination of Private Mortgage Insurance. Lenders are required to cancel PMI once the loan-to-value (LTV) ratio reaches 78% of the home’s original appraised value or purchase price, whichever is less. This termination is based on the loan’s original amortization schedule, occurring at a predetermined point regardless of any extra principal payments.

For automatic termination, the mortgage loan must be current when the 78% LTV threshold is met. Otherwise, termination is delayed until payments are current. Once conditions are met, the lender must stop charging PMI and will notify the borrower. This passive method relies on the loan’s natural amortization.

Requesting PMI Cancellation

Homeowners can actively seek to cancel their Private Mortgage Insurance before its automatic termination date. This borrower-initiated cancellation typically becomes an option once the loan’s LTV ratio reaches 80% of the home’s original purchase price or appraised value. A good payment history is usually a prerequisite, often requiring no 30-day late payments within the last 12 to 24 months and no 60-day late payments in the past year. Lenders also require no subordinate liens, such as a second mortgage or home equity line of credit.

To initiate the cancellation process, a homeowner should contact their loan servicer directly, often with a written request. They will typically need to provide their current loan balance, original loan amount, and the property’s original value. The servicer may require an updated appraisal, especially if the homeowner believes the property’s value has increased significantly. The cost of this appraisal, which can range from a few hundred dollars to over $1,000, is typically borne by the homeowner.

After receiving the request, the servicer reviews payment history and verifies property value, potentially by ordering an appraisal. Decision timeframes vary, but servicers are generally prompt. Once approved, PMI charges are removed from future mortgage payments, and the homeowner receives official notification. If the request is denied, the servicer typically provides the reasons for the denial.

Refinancing to Remove PMI

Refinancing can eliminate Private Mortgage Insurance, especially when the property’s value has appreciated or significant principal payments have been made. PMI can be removed if the new loan’s LTV ratio is 80% or less based on the current appraised value. This method leverages the property’s current market value, benefiting those with substantial equity.

Before refinancing, homeowners should consider several factors. Current interest rates are important; higher rates might offset PMI removal benefits with increased interest costs. Closing costs, typically 2-5% of the new loan amount (including origination, appraisal, and title insurance), also need to be factored in. A strong credit score helps secure favorable rates and terms.

Refinancing involves researching lenders, submitting a new application, and providing updated financial documentation. An appraisal determines the property’s current market value, crucial for calculating the new LTV ratio. If the new loan’s LTV is 80% or less, PMI is not required, allowing closing on the new mortgage without the added expense. This approach allows capitalizing on increased home equity to eliminate PMI sooner.