How to Get Rid of Your Private Mortgage Insurance

Private Mortgage Insurance, commonly known as PMI, protects the mortgage lender if a borrower stops making payments. Lenders typically require PMI when a homebuyer makes a down payment of less than 20% of the home’s purchase price. This additional monthly expense increases the cost of homeownership. This article explains methods homeowners can use to eliminate this obligation.

Automatic PMI Termination

The Homeowners Protection Act of 1998 (HPA) provides guidelines for automatic PMI termination. Under this federal law, a mortgage lender must terminate PMI once the loan-to-value (LTV) ratio reaches 78% of the original value. This calculation is based on the initial amortization schedule for the loan, regardless of any additional principal payments made by the homeowner.

For automatic termination, the borrower must be current on mortgage payments; otherwise, termination is delayed until payments are up to date. This process is passive for the homeowner, as the lender is obligated to cease collecting PMI premiums. The original value of the property is the lesser of the sales price or the appraised value at loan origination. The lender tracks the loan balance and original value to determine when this equity threshold is reached. Borrowers receive a disclosure at loan origination explaining their rights under the HPA.

Borrower Initiated PMI Cancellation

Homeowners can cancel their Private Mortgage Insurance before automatic termination. This borrower-initiated process generally requires the loan-to-value (LTV) ratio to reach 80% of the original value of the home. Some lenders may also allow cancellation based on 80% of the current appraised value if the home’s worth has increased significantly.

Lenders impose additional requirements for cancellation beyond the equity threshold. These include a strong payment history, such as no 30-day late payments within the last 12 to 24 months, and no 60-day late payments within the past year. The property must not have junior liens, like a second mortgage or home equity line of credit, that reduce the lender’s equity position.

If a homeowner believes their property’s value has appreciated, they may need a new appraisal to demonstrate the 80% LTV based on the current market value. Appraisal costs range from $400 to $600. To begin, contact your mortgage servicer for specific cancellation requirements and necessary forms. The lender will then review the request and notify the borrower of their decision.

Refinancing for PMI Removal

Refinancing an existing mortgage offers another path to eliminate Private Mortgage Insurance, especially when other methods are not immediately available or desirable. This strategy involves obtaining a new loan that replaces the current mortgage, ideally with a loan-to-value (LTV) ratio of 80% or less. By securing a new mortgage with sufficient equity from the start, the new loan will not require PMI.

Refinancing can be a suitable option if interest rates have decreased, or if the home’s value has increased significantly since the original purchase. For example, if a home purchased for $300,000 with a $280,000 loan (93% LTV) has appreciated to $400,000, a new loan of $320,000 or less would represent an 80% LTV or lower, thereby avoiding PMI. This approach effectively resets the mortgage with new terms and eliminates the insurance premium.

However, refinancing involves closing costs, which can include appraisal fees, loan origination fees, title insurance, and other charges. These costs typically range from 2% to 5% of the new loan amount. Homeowners should carefully compare these upfront expenses against the ongoing savings from eliminating PMI to determine if refinancing is a financially sound decision. The application process for a refinance is similar to applying for an original mortgage, involving credit checks, income verification, and a property appraisal.

Understanding FHA Mortgage Insurance Premiums

Federal Housing Administration (FHA) loans have a different type of mortgage insurance known as Mortgage Insurance Premiums (MIP), which operates under distinct rules compared to conventional Private Mortgage Insurance. FHA loans require both an Upfront Mortgage Insurance Premium (UFMIP) paid at closing, and an annual MIP collected monthly. Unlike conventional PMI, FHA MIP rules are generally more stringent regarding cancellation.

For most FHA loans originated after June 3, 2013, the annual MIP is typically required for the entire life of the loan, irrespective of the loan-to-value ratio. The only exception is for loans with an original loan-to-value ratio of 90% or less, where the MIP may be canceled after 11 years. This means that for many FHA borrowers, simply building equity will not automatically remove the monthly MIP payment.

The primary method for homeowners with an FHA loan to eliminate Mortgage Insurance Premiums is to refinance into a conventional loan. This becomes a viable option once the homeowner has accumulated at least 20% equity in their property, allowing them to secure a conventional mortgage without the requirement for PMI. This distinction is important for FHA borrowers to understand, as their path to removing mortgage insurance differs significantly from those with conventional mortgages.