How to Get Rid of Private Mortgage Insurance

Private Mortgage Insurance (PMI) protects lenders, not homeowners, in case a borrower defaults on their mortgage payments. It is typically required when a homebuyer makes a down payment of less than 20% of the home’s purchase price, leading to a loan-to-value (LTV) ratio exceeding 80%. While PMI adds to the monthly mortgage expense, there are distinct pathways for homeowners to eliminate this cost. Understanding these processes can help borrowers reduce their overall housing expenditures over time.

Automatic PMI Termination

Federal law mandates the automatic termination of Private Mortgage Insurance under specific conditions, as outlined by the Homeowners Protection Act of 1998. This protection applies to most residential mortgages, ensuring that PMI does not remain indefinitely. A condition for automatic termination is when the principal balance of the mortgage is scheduled to reach 78% of the property’s original value. This calculation is based on the initial amortization schedule for the loan, assuming regular, on-time payments.

The original value of the property is generally defined as the lesser of the sales price or the appraised value at the time the loan was originated. For termination to occur, the borrower must be current on their mortgage payments; otherwise, termination is delayed until the loan is current.

PMI also automatically terminates when the loan reaches the midpoint of its amortization period, regardless of the loan-to-value ratio. This provision ensures PMI eventually ends even if property values decline or the borrower makes only minimum payments. Mortgage servicers are required to inform borrowers annually about their right to cancel PMI and to notify them when PMI has been terminated.

Requesting PMI Cancellation

Homeowners can proactively request the cancellation of Private Mortgage Insurance once their equity in the home reaches a certain threshold, often sooner than automatic termination. A common requirement for borrower-initiated cancellation is when the loan-to-value (LTV) ratio reaches 80% of the property’s original value or current appraised value, whichever is more beneficial to the homeowner.

Beyond the LTV requirement, lenders typically require a strong payment history, such as no 30-day late payments within the past 12 months and no 60-day late payments within the past 24 months. The property must not have any subordinate liens, like a second mortgage or a home equity line of credit (HELOC), that would push the combined LTV ratio above the acceptable threshold. To establish the current property value for a cancellation request, homeowners often need to obtain a new appraisal, which they typically pay for. An appraisal provides an independent, professional estimate of the home’s market value.

Once a homeowner believes they meet the criteria, they should contact their mortgage servicer to initiate the cancellation process. This typically involves submitting a formal written request for PMI cancellation. The servicer will then review the loan’s payment history and the property’s current LTV, often requiring the recently obtained appraisal report. The servicer will review the information and notify the borrower of their decision, usually within 30 days.

Other Ways to Eliminate PMI

Beyond the standard cancellation and automatic termination processes, homeowners have alternative strategies to eliminate Private Mortgage Insurance. One common method is refinancing the mortgage. If a homeowner refinances their existing loan into a new mortgage with a loan-to-value ratio of 80% or less, PMI will generally not be required on the new loan. This can be particularly beneficial if property values have appreciated significantly since the original purchase, allowing a lower LTV without a substantial new cash injection.

Refinancing also offers an opportunity to switch from a loan type that always requires mortgage insurance, such as an FHA loan, to a conventional loan that does not, provided the equity threshold is met. It is important to consider the closing costs associated with a new mortgage, which can range from 2% to 5% of the loan amount, to determine if refinancing is a financially sound decision for PMI removal.

Another proactive approach to eliminate PMI is by consistently making extra principal payments on the mortgage. By directly reducing the loan’s principal balance, homeowners can accelerate the pace at which their loan-to-value ratio reaches the 80% or 78% thresholds required for cancellation or automatic termination. When making extra payments, it is essential to clearly instruct the mortgage servicer to apply the additional funds directly to the principal balance, rather than advancing the next month’s payment.