When and How Does Mortgage Insurance Stop?

Mortgage insurance serves as a protective measure for lenders, mitigating the financial risk associated with borrowers who make a down payment of less than 20% on a home. This insurance allows individuals to purchase a home with a smaller upfront investment, making homeownership more accessible. While it adds to the monthly mortgage payment, mortgage insurance is not always a permanent expense. Understanding the conditions and processes for its termination can provide homeowners with significant financial relief over time.

Private Mortgage Insurance (PMI) Termination

Private Mortgage Insurance (PMI) is typically required for conventional loans when the down payment is less than 20% of the home’s purchase price. PMI is paid by the borrower, usually as part of the monthly mortgage payment, and is distinct from other forms of mortgage insurance.

The Homeowners Protection Act (HPA) of 1998 established specific rules for the cancellation and termination of PMI for loans closed on or after July 29, 1999. One method is automatic termination, where PMI must be cancelled by the lender when the loan-to-value (LTV) ratio reaches 78% of the original home value. This calculation is based on the original amortization schedule, and the loan must be current for termination to occur.

Beyond automatic termination, borrowers can also request early cancellation of PMI. This can be initiated once the loan’s LTV ratio reaches 80% of the original home value. Original value is defined as the lesser of the contract sales price or appraised value at loan origination.

Several conditions must be met for a borrower-requested PMI termination. The homeowner must submit a written request to their loan servicer. A good payment history is also required, typically meaning no payments 60+ days late in 24 months, or 30+ days late in 12 months.

Furthermore, the property must not have any subordinate liens, such as a second mortgage or a home equity line of credit. In some cases, especially if the borrower is relying on property appreciation to reach the 80% LTV threshold, the lender may require a new appraisal to confirm the home’s current market value.

Even if these conditions are not met earlier, the HPA also mandates a final termination of PMI by the midpoint of the loan’s amortization period. For a 30-year fixed-rate mortgage, this would be after 15 years, provided the borrower is current on their mortgage payments.

FHA Mortgage Insurance Premium (MIP) Termination

Federal Housing Administration (FHA) loans have a different type of mortgage insurance known as the Mortgage Insurance Premium (MIP). Unlike PMI, which is for conventional loans, FHA MIP is required for all FHA-backed mortgages, regardless of the down payment amount. It has two components: an Upfront Mortgage Insurance Premium (UFMIP) paid at closing, and an annual MIP paid monthly.

The rules for FHA MIP termination depend significantly on when the loan was originated and the initial loan-to-value (LTV) ratio. For FHA loans with case numbers assigned on or after June 3, 2013, the cancellation policies are more restrictive. If the original LTV was 90% or less, the annual MIP can be cancelled after 11 years.

However, for FHA loans originated on or after June 3, 2013, with an original LTV greater than 90%, the annual MIP is generally required for the entire life of the loan. In these situations, the MIP will not automatically cancel unless the loan is paid off or refinanced into a non-FHA loan.

For FHA loans originated before June 3, 2013, the termination rules were typically more lenient. Many of these older loans allowed for the cancellation of MIP once the loan’s LTV ratio reached 78%.

A key distinction is that FHA MIP, especially for loans originated after June 2013 with lower down payments, often cannot be cancelled like PMI. This difference means that homeowners with such FHA loans may need to explore refinancing options to eliminate the ongoing MIP expense.

Key Factors and Actions for Stopping Mortgage Insurance

A current home appraisal can be a significant tool for those with Private Mortgage Insurance (PMI) whose home value has appreciated. If a home’s market value has increased substantially, an appraisal might demonstrate that the loan-to-value (LTV) ratio has fallen below the required threshold for PMI cancellation. The homeowner typically bears the cost of this appraisal, which can range from $400 to over $1,000 depending on location and property size.

Refinancing the mortgage is another common and effective strategy to eliminate mortgage insurance, especially for non-cancellable FHA Mortgage Insurance Premium (MIP). By obtaining a new loan, a homeowner can replace their current mortgage, potentially securing a lower interest rate or a new loan type that does not require mortgage insurance. This strategy is viable if the new loan’s LTV ratio is below the threshold for requiring insurance.

However, refinancing involves closing costs, which typically range from 2% to 6% of the new loan amount. These costs can include appraisal fees, loan origination fees, and title insurance. Homeowners should weigh these upfront expenses against the long-term savings from eliminating mortgage insurance to determine if refinancing is financially beneficial for their specific situation.

Regardless of the type of mortgage insurance, contacting the loan servicer is the primary actionable step for homeowners. Borrowers should formally inquire about their specific mortgage insurance termination procedures and understand all requirements. It is advisable to submit a written request for cancellation, detailing the basis for the request, such as reaching the required equity level or the loan’s midpoint.

Lender-Paid Mortgage Insurance (LPMI) differs from borrower-paid PMI. With LPMI, the lender pays the mortgage insurance premium, but this cost is passed on to the borrower through a slightly higher interest rate on the loan. Unlike traditional PMI, LPMI does not “stop” or cancel once a certain equity threshold is reached. The higher interest rate remains for the life of the loan or until the loan is refinanced. If a homeowner believes their lender is not complying with the Homeowners Protection Act (HPA) regarding PMI termination, they should send a written request to the servicer and, if necessary, contact relevant regulatory bodies.