How to Get Rid of Private Mortgage Insurance

Private Mortgage Insurance (PMI) is a type of insurance often required for conventional mortgages with a down payment less than 20% of the home’s purchase price. It protects the mortgage lender if the homeowner defaults on the loan. PMI helps lenders manage risk with higher loan-to-value (LTV) mortgages, enabling more individuals to achieve homeownership without a large initial investment. This article explains methods homeowners can use to eliminate PMI, potentially reducing monthly housing costs.

Types of Private Mortgage Insurance and Basic Eligibility for Removal

The most common type of PMI is Borrower-Paid Mortgage Insurance (BPMI), paid monthly and generally cancellable once equity thresholds are met. Lender-Paid Mortgage Insurance (LPMI) involves the lender covering the cost for a slightly higher interest rate; LPMI is not directly cancellable as its cost is embedded in the loan’s interest rate.

The Loan-to-Value (LTV) ratio is central to PMI removal, representing the relationship between the outstanding loan balance and the home’s value. LTV is calculated by dividing the current loan balance by the home’s current appraised value. For example, a $300,000 home with a $240,000 loan has an 80% LTV. Lenders typically require PMI when LTV exceeds 80%, meaning less than 20% equity.

To remove BPMI, homeowners generally need to reach 20% equity (80% LTV). This can be achieved through regular or additional principal payments, or an increase in the home’s market value. Other factors for eligibility include a consistent history of on-time mortgage payments and the loan’s age.

Automatic PMI Termination Under Federal Law

Federal law, specifically the Homeowners Protection Act (HPA) of 1998, mandates automatic termination of Private Mortgage Insurance for conventional loans. The HPA outlines two primary conditions for automatic termination, ensuring that PMI is eventually removed without the homeowner needing to take action.

The first trigger occurs when the loan’s principal balance is scheduled to reach 78% of the property’s original value, defined as the lesser of the sales price or appraised value at loan origination. This calculation uses the initial amortization schedule, regardless of extra payments. The homeowner must be current on payments for termination.

The second condition, the “midpoint” rule, ensures PMI removal even if the 78% LTV threshold isn’t met sooner. Under the HPA, PMI automatically terminates on the first day of the month following the midpoint of the loan’s amortization schedule. For a 30-year mortgage, this is typically after 15 years. The borrower must be current on payments for this to take effect. Loan servicers must notify borrowers about automatic PMI termination, confirming removal and indicating future payments will exclude PMI. The HPA applies primarily to conventional loans on primary residences.

Borrower-Requested PMI Cancellation

Homeowners can proactively request PMI cancellation on their conventional loan, potentially removing it sooner than federal law requires. This requires demonstrating sufficient home equity. The primary condition for cancellation is an 80% LTV ratio based on the property’s original value. Some lenders may consider the current appraised value if it has appreciated significantly, though this varies.

Lenders also impose additional criteria: a consistent payment history, typically no 30-day late payments in the past 12 months or 60-day late payments in 24 months. The property should also be free of junior liens, like a second mortgage or HELOC. Lenders often require a new appraisal to verify current market value, especially if based on appreciation. The homeowner generally pays for this appraisal.

To initiate cancellation, contact your loan servicer directly and submit a written request. The servicer will provide instructions and forms. If an appraisal is required, cooperate with scheduling. After submitting documentation and a successful appraisal, the servicer reviews the request and informs the homeowner of approval or denial and the effective removal date.

Eliminating PMI Through Refinancing

Refinancing is another way homeowners can eliminate Private Mortgage Insurance, especially with changing market conditions or home equity. This involves obtaining a new mortgage to pay off the existing one, replacing it with new terms. Refinancing eliminates PMI by securing a new loan with an LTV of 80% or less based on the property’s current appraised value. If this equity threshold is met, the lender will not require PMI on the new mortgage, stopping payments upon closing.

Refinancing is advantageous if the home’s value has appreciated significantly, as this directly reduces the LTV. For example, a homeowner with an LTV greater than 80% might now qualify for a new loan without PMI due to payments and market appreciation. Refinancing also allows switching loan types; FHA loan holders, for instance, can refinance into a conventional loan to remove mortgage insurance if they meet conventional equity requirements.

While refinancing eliminates PMI, consider the associated closing costs. These costs, including application, appraisal, title insurance, and origination fees, typically range from 2% to 6% of the new loan amount. Homeowners should evaluate if PMI savings and potential interest rate reductions outweigh these upfront expenses. The general refinancing process involves researching lenders, submitting an application, underwriting, obtaining a new appraisal, and closing on the new mortgage.