How to Remove Mortgage Insurance From Your Loan

Mortgage insurance serves as a protective measure for lenders against potential losses if a borrower defaults on their home loan. This financial safeguard is typically required when a homeowner makes a down payment of less than 20% of the home’s purchase price. While it adds to the monthly housing expense, specific conditions allow for its removal, potentially reducing the overall mortgage payment. Understanding these conditions and the steps for removal can provide homeowners with a clear path to reducing their financial obligations.

Types of Mortgage Insurance

Mortgage insurance comes in different forms, primarily Private Mortgage Insurance (PMI) and Mortgage Insurance Premium (MIP). Each is associated with distinct loan types and has unique rules for cancellation. PMI is typically required for conventional loans when the borrower’s down payment is less than 20% of the home’s purchase price. This insurance protects the lender if the borrower stops making payments, allowing individuals to obtain mortgage financing with a lower initial equity contribution. PMI premiums are commonly paid as a monthly addition to the mortgage payment, though they can also be paid as a single upfront premium or a combination of both.

The Mortgage Insurance Premium (MIP) is specific to loans insured by the Federal Housing Administration (FHA). Unlike PMI, MIP is required for all FHA loans, regardless of the down payment amount. FHA MIP consists of two components: an Upfront Mortgage Insurance Premium (UFMIP) and an Annual Mortgage Insurance Premium (Annual MIP). The UFMIP is a one-time fee, typically 1.75% of the loan amount, which can be paid at closing or financed into the loan. The Annual MIP is a recurring charge, paid in monthly installments, with rates generally ranging from 0.15% to 0.75% of the loan amount, depending on factors like loan-to-value (LTV) ratio and loan term.

Meeting the Criteria for Removal

The ability to remove mortgage insurance depends heavily on the type of loan and when it was originated, with specific criteria established for both PMI and FHA MIP. For Private Mortgage Insurance (PMI) associated with conventional loans, the Homeowners Protection Act of 1998 (HPA) outlines the primary pathways for cancellation. This federal law ensures that homeowners are not required to pay for PMI indefinitely.

Under the HPA, PMI can be removed in two main ways: borrower-requested cancellation and automatic termination. A borrower can request cancellation of PMI once their loan-to-value (LTV) ratio reaches 80% of the home’s original value. “Original value” is typically defined as the lesser of the sales price or the appraised value at the time the loan was originated. To qualify for a borrower-requested cancellation, the homeowner must submit a written request to their loan servicer, maintain a good payment history (generally no payments 30 days late in the past 12 months or 60 days late in the past 24 months), and certify that there are no subordinate liens on the property. Lenders may also require an appraisal, paid for by the borrower, to confirm that the property’s value has not declined below its original value.

Automatic termination of PMI occurs when the loan’s principal balance is scheduled to reach 78% of the original value of the mortgaged property, based on the original amortization schedule. This termination is mandated by the HPA, provided the loan is current on payments. Even if the LTV has not reached 78%, PMI must also be terminated when the loan reaches the midpoint of its amortization period, such as 15 years on a 30-year loan, if the borrower is current on payments.

For FHA Mortgage Insurance Premium (MIP), the rules for removal are heavily dependent on the loan’s origination date and the initial down payment amount. For FHA loans originated on or after June 3, 2013, MIP generally remains for the entire life of the loan if the original down payment was less than 10%. However, if the original down payment was 10% or more, the MIP will automatically cancel after 11 years.

FHA loans originated before June 3, 2013, have different cancellation criteria. For these loans, MIP can typically be removed once the loan-to-value (LTV) ratio reaches 78%. This LTV calculation is based on the original value of the property. Additionally, for loans originated before this date, borrowers typically need to have made on-time payments for at least five years on loans with terms of 20, 25, or 30 years, with no time limit for 15-year loans.

Steps to Request Removal

Initiating the mortgage insurance removal process involves direct communication with the loan servicer. Homeowners can usually find the servicer’s contact information on their monthly mortgage statement or by visiting the servicer’s website. When contacting them, it is helpful to ask for the “mortgage insurance removal” or “loan servicing” department to ensure speaking with the correct personnel.

It is advisable to follow up the initial contact with a formal written request for PMI or MIP cancellation. Sending this request via certified mail provides proof of delivery and creates a clear record of the communication. The written request should include the loan number, property address, and a clear statement indicating the desire to cancel mortgage insurance, along with any supporting documentation of eligibility.

The servicer will typically require specific documentation to verify eligibility, especially if the request is based on increased property value. This often includes a recent appraisal of the home, which the servicer may arrange at the homeowner’s expense to confirm the current loan-to-value ratio. Additionally, the servicer will review the payment history to ensure it meets the “good payment history” criteria. The borrower may also need to certify the absence of any junior liens on the property.

After the request and supporting documentation are submitted, the servicer will review the information. The timeline for this review and decision can vary, but servicers typically process requests and provide a determination within a reasonable timeframe, often within 30 business days. If the request is approved, the mortgage insurance payments will cease, and the servicer will notify the homeowner in writing, often providing an updated billing statement reflecting the new monthly payment amount. If the request is denied, the servicer is required to provide a written explanation of the grounds for denial.