When Can I Cancel My Mortgage Insurance?

When securing a mortgage, especially with a down payment less than 20%, borrowers typically encounter mortgage insurance. This insurance, whether Private Mortgage Insurance (PMI) for conventional loans or Mortgage Insurance Premium (MIP) for FHA loans, protects the lender against financial loss if the borrower defaults on the loan. While it protects the lender, the cost of this insurance is passed on to the borrower, adding to the total monthly mortgage payment.

Automatic Cancellation of Private Mortgage Insurance

Private Mortgage Insurance (PMI) applies to conventional loans. The Homeowners Protection Act (HPA) of 1998 provides specific guidelines for the automatic cancellation of PMI. This federal law mandates that lenders must automatically terminate PMI once the loan balance is scheduled to reach 78% of the original value of the home, which is typically the lesser of the purchase price or the appraised value at the time of closing.

Another condition for automatic cancellation under the HPA occurs when the loan reaches the midpoint of its original amortization schedule. For example, on a 30-year loan, PMI would be automatically terminated after 15 years, provided the borrower is current on their payments. This ensures that even if the 78% loan-to-value (LTV) threshold has not been met through accelerated payments, the insurance will eventually cease. It is important that the borrower remains current on all mortgage payments for this automatic cancellation to occur.

Requesting Early Cancellation of Private Mortgage Insurance

Beyond automatic cancellation, homeowners can proactively request its early removal. A borrower can typically ask their loan servicer to cancel PMI once the loan balance reaches 80% of the home’s original value. The original value is defined as the lesser of the sales price or the appraised value at the time of loan origination. This option allows borrowers to stop paying PMI sooner if they have built equity ahead of schedule.

To successfully request early PMI cancellation, a borrower must meet several requirements. A good payment history is essential, generally meaning no payments that were 30 days or more late in the last 12 months, and no 60-day late payments in the last 24 months. Additionally, the property’s value should not have declined below its original value, and there should be no subordinate liens, such as a second mortgage or home equity line of credit, on the property. The lender may require a new appraisal, at the borrower’s expense, to verify the current property value and confirm sufficient equity. Appraisal costs can range from $400 to over $700, depending on location and property specifics.

The procedural steps for requesting cancellation involve contacting the loan servicer and submitting a written request. The servicer will then provide instructions and forms, potentially including a PMI removal application. Following these instructions, which may include providing documentation or arranging for an appraisal, is crucial for the timely processing of the cancellation request.

Mortgage Insurance Premium for FHA Loans

Federal Housing Administration (FHA) loans have Mortgage Insurance Premium (MIP). FHA loans require both an upfront mortgage insurance premium (UFMIP), typically 1.75% of the loan amount, which can be financed into the loan, and an annual MIP paid monthly. Unlike PMI, MIP is generally required for all FHA loans, regardless of the down payment amount.

The cancellation rules for FHA MIP depend on the loan’s origination date and the initial loan-to-value (LTV) ratio. For FHA loans originated after June 3, 2013, with an original LTV greater than 90%, the MIP is typically paid for the entire life of the loan. However, for FHA loans originated after June 3, 2013, with an original LTV of 90% or less, the MIP is generally paid for 11 years.

For FHA loans originated before June 3, 2013, MIP cancellation rules are more lenient. For instance, if the loan was originated between January 2001 and June 3, 2013, MIP may be canceled once the loan-to-value ratio reaches 78%, provided the borrower has a good payment history. For many FHA borrowers, especially those with loans originated after June 2013 with higher LTVs, refinancing into a conventional loan is often the only viable method to eliminate the MIP before the full term. This refinancing option requires meeting the conventional loan’s eligibility criteria, including credit score and equity requirements.