When Can I Cancel Private Mortgage Insurance (PMI)?

Private Mortgage Insurance (PMI) is a specialized insurance policy that protects mortgage lenders from financial loss if a borrower defaults on their loan. Lenders typically require PMI when a homebuyer makes a down payment of less than 20% of the home’s purchase price. This insurance reduces the risk for the lender, making it possible for individuals to purchase a home with a smaller upfront investment. The cost of PMI is usually added to the borrower’s monthly mortgage payment.

Automatic PMI Cancellation

The Homeowners Protection Act (HPA) of 1998 establishes specific rules for the automatic termination of PMI. A mortgage servicer must automatically cancel PMI when the principal balance of the mortgage is scheduled to reach 78% of the original value of the property. The original value is defined as the lesser of the sales price or the appraised value at the time the loan was made. This automatic cancellation is based on the initial amortization schedule, regardless of any additional principal payments.

For certain high-risk loans, PMI may also be automatically terminated at the midpoint of the loan’s amortization period. This midpoint rule applies even if the loan balance has not yet reached the 78% loan-to-value (LTV) threshold. For example, on a 30-year fixed-rate mortgage, the midpoint would be after 15 years, regardless of the remaining balance. The HPA also mandates that lenders inform borrowers annually about their PMI cancellation rights and provide an estimated date for its automatic termination.

This notification helps borrowers understand when they can expect PMI to cease without any action on their part. The servicer tracks the loan balance and initiates cancellation once the 78% LTV is achieved. Once automatic cancellation occurs, the borrower’s monthly payment will decrease.

Borrower-Initiated PMI Cancellation

Borrowers can proactively request the cancellation of PMI before it would automatically terminate. This borrower-initiated cancellation is generally possible once the loan balance reaches 80% of the home’s original value. This 80% LTV threshold allows borrowers to take action sooner than the automatic 78% LTV cancellation.

To qualify for borrower-initiated cancellation, several conditions must be met beyond the loan-to-value requirement. The borrower must have a good payment history, which usually means no mortgage payments that were 30 or more days late within the past 12 months, and no payments that were 60 or more days late within the past 24 months. The property also must not have any junior liens, such as a second mortgage or a home equity line of credit, as these increase the lender’s risk.

A lender may require a new property appraisal to confirm the current market value. This appraisal ensures that the home’s value has not declined, which could affect the actual loan-to-value ratio. The cost of this new appraisal is typically the responsibility of the borrower. Meeting these criteria allows a borrower to submit a request, though the lender will still need to verify all conditions before approving the cancellation.

Distinguishing Other Mortgage Insurance

While PMI is common for conventional loans, other types of mortgage insurance exist with different rules for their cancellation or application. An example is the Mortgage Insurance Premium (MIP) associated with Federal Housing Administration (FHA) loans. FHA loans require both an upfront MIP, which is a percentage of the loan amount paid at closing (or financed into the loan), and an annual MIP, paid monthly as part of the mortgage payment. For FHA loans with an original loan-to-value (LTV) ratio of 90% or higher, the annual MIP generally remains for the entire life of the loan.

If the original LTV on an FHA loan was below 90%, the annual MIP may be canceled after 11 years. Veterans Affairs (VA) loans, designed for eligible service members, veterans, and surviving spouses, operate differently. They have a one-time VA Funding Fee. This fee, typically a percentage of the loan amount, is often financed into the loan.

The VA Funding Fee is a one-time charge at loan origination. Another type is Lender-Paid Mortgage Insurance (LPMI). With LPMI, the lender pays the mortgage insurance premium, but the borrower typically accepts a slightly higher interest rate on the loan in exchange. Because the cost of LPMI is integrated into the interest rate, it cannot be canceled at any point during the loan’s term.

Steps for PMI Cancellation

Once a borrower believes they meet the eligibility criteria for PMI cancellation, the first practical step is to contact their mortgage servicer. The servicer is the company to which monthly mortgage payments are made, and they can provide specific details on their cancellation policies and confirm the borrower’s eligibility based on their internal records. This initial contact helps understand any unique requirements or procedures the servicer may have.

After confirming eligibility and gathering any necessary information, the borrower should formally submit a cancellation request. This often involves sending a written letter to the servicer, though some servicers may offer a specific form or an online portal for such requests. Include any documentation the servicer requires, such as a recent appraisal report. While the servicer will internally verify payment history and the absence of junior liens, ensuring all requested documents are submitted can expedite the process.

The mortgage servicer will then review the submitted request and all supporting documentation to verify that all eligibility conditions have been met. This review period can vary but typically takes several weeks. Following the review, the servicer will notify the borrower of their decision. If the cancellation is approved, the notification will include the effective date of the PMI removal and the adjusted monthly payment amount.

If there are delays in the process or if the servicer denies the request, the borrower should follow up promptly. Understanding the reason for any denial is helpful, as it may be due to an unmet condition that can be addressed. Maintaining clear communication with the servicer throughout this process is vital for successful PMI cancellation.