How to Remove Private Mortgage Insurance

Private Mortgage Insurance (PMI) protects mortgage lenders from financial loss if a borrower defaults on a conventional loan. It is typically required when a homebuyer makes a down payment of less than 20% of the home’s purchase price, indicating a higher loan-to-value (LTV) ratio and increased risk for the lender. Although the borrower pays the premiums, PMI does not offer direct protection to the homeowner; it safeguards the lender’s investment. Borrowers often seek to remove PMI to reduce their monthly housing expenses.

Automatic Termination of PMI

The Homeowners Protection Act (HPA) of 1998 establishes guidelines for automatic PMI termination. This federal law mandates lenders automatically cancel PMI once the loan balance is scheduled to reach 78% of the property’s original value. This calculation is based on the initial amortization schedule, irrespective of additional principal payments. For termination to occur, the borrower must be current on payments.

Another condition for automatic termination under the HPA is reaching the midpoint of the loan’s amortization period. For instance, on a 30-year mortgage, PMI must terminate after 15 years, provided the borrower is current on payments. This applies even if the 78% LTV threshold has not been met. These rules apply to single-family primary residences for loans closed on or after July 29, 1999.

Borrower-Requested PMI Cancellation

Homeowners can request PMI cancellation once their loan-to-value (LTV) ratio reaches 80% of the property’s original value. This original value is typically the lesser of the contract sales price or appraised value at purchase, or the appraised value if refinanced. Reaching this 80% LTV often involves paying down the principal balance.

A good payment history is necessary for borrower-requested cancellation: no payments 30 days or more past due in the past 12 months, and no payments 60 days or more past due in the past 24 months. The property must not be subject to junior liens, such as a second mortgage or home equity line of credit. Lenders may also require confirmation that the property’s value has not declined below its original value.

To initiate the process, borrowers should contact their mortgage servicer. The servicer can provide details on whether an appraisal is necessary to verify current property value, especially if the request is based on market appreciation or home improvements. If required, appraisal costs typically range from $300 to $700 and are the borrower’s responsibility. Factors like property size, location, and market conditions influence the fee.

The PMI Removal Process

Once eligibility is confirmed and documentation gathered, the formal process of requesting PMI cancellation can begin. This involves submitting a written request to the mortgage servicer. The request should state the intent to cancel PMI and include the loan number, date, and signatures of all borrowers. Any required forms and a recent appraisal report, if applicable, should accompany this request.

Upon receiving the request, the mortgage servicer will review it to verify all eligibility criteria are met. This includes confirming the loan’s LTV ratio, payment history, and absence of junior liens. Servicers are required to notify the borrower in writing within 30 days of a decision. If approved, the servicer will cease collecting PMI premiums, and the monthly mortgage payment will adjust.

Any unearned PMI premiums must be returned to the borrower, typically within 45 days after cancellation or termination. If denied, the servicer must provide written notice detailing the reasons. If an appraisal was used, results must also be provided.

Refinancing to Remove PMI

Refinancing the mortgage is an alternative for removing Private Mortgage Insurance. This involves obtaining a new mortgage loan that replaces the existing one, ideally with an LTV ratio of 80% or less, eliminating the need for PMI. Borrowers may consider this if their home’s value has significantly appreciated or if current interest rates are lower.

Refinancing can eliminate PMI and potentially secure a lower interest rate, leading to substantial long-term savings. However, this approach comes with associated closing costs, which can range from a few thousand dollars to a percentage of the new loan amount. These costs must be weighed against potential savings.

The decision to refinance should consider the impact on the loan term and new interest rate. While a new loan can remove PMI, it might extend the repayment period or result in a higher overall interest expense if rates have risen. Refinancing can also be a viable option for those with Federal Housing Administration (FHA) loans, which typically have Mortgage Insurance Premiums (MIP) that may be required for the life of the loan; converting to a conventional loan through refinancing can eliminate this ongoing expense.