How to Get Rid of Private Mortgage Insurance

Private Mortgage Insurance (PMI) is an additional cost for homeowners with a conventional loan and a down payment less than 20% of the home’s purchase price. This insurance protects the lender, not the borrower, if the borrower defaults on their mortgage payments. While PMI can help facilitate homeownership by reducing the initial financial hurdle of a large down payment, it adds to the monthly mortgage expense. Understanding how to eliminate PMI can lead to significant savings over the life of a loan.

Automatic PMI Termination

Federal law, the Homeowners Protection Act (HPA) of 1998, provides guidelines for automatic PMI termination. Lenders must automatically cancel PMI when a conventional loan’s principal balance reaches 78% of the home’s original value. This termination is based on the original amortization schedule, meaning scheduled payments determine when this loan-to-value (LTV) ratio is achieved.

Automatic termination also occurs by the first day of the month following the midpoint of the loan’s amortization period. These cancellations are triggered without borrower action, provided loan payments are current on the scheduled termination date. If the loan is not current, PMI termination occurs on the first day of the month after the borrower becomes current.

Borrower-Requested PMI Cancellation Requirements

Homeowners can proactively request PMI cancellation once their loan balance reaches 80% of the property’s original value. This “original value” is the lesser of the sales price or appraised value at loan origination, or the appraised value if a refinance. This option allows borrowers to eliminate PMI sooner than automatic termination if they pay down their mortgage aggressively or if the property value has increased.

To qualify for borrower-requested cancellation, several conditions must be met. The borrower must have a good payment history, meaning no 30-day late payments in the last 12 months and no 60-day late payments in the last 24 months. The loan must also be current at the time of the request. Additionally, there should be no junior liens, such as a second mortgage or home equity line of credit (HELOC), on the property.

Lenders may require an appraisal to confirm the current property value, especially if the request is based on increased home equity due to market appreciation or significant home improvements. This appraisal verifies the loan-to-value (LTV) ratio has fallen to the required 80% threshold. The mortgage servicer is generally required to order this appraisal, not the borrower directly.

The PMI Cancellation Process

Once a homeowner meets the eligibility criteria for PMI cancellation, the next step involves initiating a formal request with their mortgage servicer. The process begins by contacting the servicer directly, often through a written request, to express the intent to cancel PMI. This written communication should state the request for PMI cancellation and include the loan number.

The mortgage servicer will then provide specific forms or instructions detailing the documentation required to process the cancellation. This documentation often includes proof of the home’s current value, such as an appraisal report, if cancellation is based on increased property value.

After submitting the written request and all necessary documents, the servicer will review the information to verify eligibility. If approved, PMI payments will cease, leading to a reduction in the monthly mortgage payment.

Refinancing Your Mortgage

Refinancing the mortgage presents another path to eliminate PMI, especially when property values have increased significantly or a substantial amount of principal has been repaid. By obtaining a new mortgage loan with a loan-to-value (LTV) ratio of 80% or less, PMI can be avoided entirely. This method is attractive if current interest rates are lower than the original loan’s rate, potentially offering additional savings.

Refinancing involves specific financial considerations. Borrowers will incur closing costs, which typically range from 2% to 6% of the new loan amount. It is important to calculate the break-even point, which is the time it takes for monthly savings from eliminating PMI and potentially securing a lower interest rate to offset these upfront refinancing costs. Additionally, refinancing can reset the loan term, potentially extending the repayment period if a new 30-year mortgage is chosen.