How to Get Rid of Private Mortgage Insurance (PMI)

Private Mortgage Insurance (PMI) protects lenders against losses if a borrower defaults on a mortgage loan. Lenders require PMI when a homebuyer makes a down payment of less than 20% of the home’s purchase price. This insurance makes homeownership more accessible by allowing a lower upfront investment. Although PMI protects the lender, the homeowner pays the premiums, which are included in the monthly mortgage payment.

Understanding PMI Termination

The ability to terminate Private Mortgage Insurance (PMI) is governed by specific conditions outlined in the Homeowners Protection Act (HPA). This federal law establishes clear guidelines for both automatic termination and borrower-initiated cancellation of PMI.

Automatic PMI termination occurs when the loan-to-value (LTV) ratio reaches 78% of the home’s original value, which is the lesser of the appraised value or purchase price at loan origination. This termination is mandatory by law, provided the borrower is current on all mortgage payments. Automatic termination also occurs when the loan reaches its scheduled midpoint, such as 15 years into a 30-year mortgage, if the borrower is current with payments.

Homeowners can proactively request PMI cancellation once their mortgage balance reaches 80% of the home’s original value. This “borrower-initiated” cancellation requires a written request to the loan servicer. To qualify, a good payment history is essential, typically meaning no significant late payments in the last year. Lenders also require certification that no junior liens, such as a second mortgage or home equity line of credit, exist on the property, as these affect the loan-to-value ratio and lender’s risk.

Homeowners may seek cancellation based on the property’s current market value, especially if it has appreciated significantly or if substantial improvements have been made. For this type of request, lenders may require a new appraisal to confirm the updated value and ensure the LTV ratio meets the necessary threshold, around 20% equity. This allows homeowners to leverage increased property value to reach the equity requirement sooner.

Requesting PMI Cancellation

Initiating the process to cancel Private Mortgage Insurance (PMI) requires direct communication with your mortgage servicer. Homeowners should contact their mortgage servicer to understand the specific requirements and procedures for PMI cancellation. This initial contact helps confirm eligibility and clarifies any particular forms or documentation needed.

Once eligibility is confirmed, submit a formal written request. This request is typically made in writing, though some servicers may offer online portals for submission. Include your loan number and any supporting documentation, such as evidence of property improvements if applicable.

If your servicer requires a new appraisal to verify the property’s current market value, they will arrange for an approved appraiser to conduct the evaluation. The homeowner usually bears the cost of this appraisal, which can range from approximately $350 to $700. This appraisal provides an independent assessment of the home’s value for calculating the loan-to-value ratio.

After receiving the formal request and any required appraisal, the mortgage servicer will review the documentation to determine if all criteria for cancellation have been met. The servicer is obligated to notify the homeowner of their decision and when PMI payments will cease. If approved, any unearned PMI premiums must be returned to the homeowner, typically within 45 days of the cancellation date.

FHA Mortgage Insurance

Federal Housing Administration (FHA) loans include a distinct type of mortgage insurance called the Mortgage Insurance Premium (MIP), which operates under different rules than conventional PMI. Unlike PMI, which is tied to the borrower’s equity, FHA MIP is a mandatory fee for all FHA loans, regardless of the down payment amount. This insurance protects the FHA, which in turn insures the lender against borrower default.

For most FHA loans, MIP is required for the entire life of the loan. This means monthly MIP payments continue even with substantial equity, unless specific conditions are met. An exception applies if the original loan-to-value (LTV) ratio was 90% or less (a down payment of at least 10%), where MIP may be removed after 11 years.

Homeowners with FHA loans where MIP cannot be automatically removed often consider refinancing as their primary option to eliminate the insurance payment. Refinancing into a conventional loan allows the borrower to secure a new loan without mortgage insurance.

Refinancing to Remove PMI

Refinancing is an effective strategy to eliminate Private Mortgage Insurance (PMI), especially if a homeowner has built significant equity (20% or more) and current interest rates are lower than their existing mortgage rate. This can reduce monthly payments by removing PMI and securing a more favorable interest rate.

The process involves taking out a new mortgage loan to pay off the existing one. If the new loan’s loan-to-value (LTV) ratio is 80% or less, based on the property’s current appraised value, PMI will not be required. This leverages accumulated equity to bypass mortgage insurance.

While refinancing offers a clear path to PMI removal, it involves closing costs, which can range from 2% to 5% of the new loan amount. These costs include fees for appraisal, title services, and other administrative expenses. Homeowners should weigh these upfront expenses against the long-term savings from eliminating PMI and any potential interest rate reduction. Calculating a break-even point, where the savings outweigh the refinancing costs, helps determine if this is a financially sound decision.