When Can I Remove Private Mortgage Insurance (PMI)?

Private Mortgage Insurance (PMI) is a coverage typically required with a conventional mortgage when the buyer makes a down payment of less than 20% of the home’s value. This insurance protects the lender against financial loss if the borrower defaults on the loan, as a lower down payment signifies increased risk for the lender. PMI adds to the monthly mortgage payment, representing an additional cost for the homeowner.

Understanding Different Mortgage Insurance Rules

Mortgage insurance rules vary significantly depending on the loan type. Private Mortgage Insurance (PMI) applies to conventional loans, which are not backed by the government. Conversely, Mortgage Insurance Premium (MIP) is associated with Federal Housing Administration (FHA) loans. While both serve to protect the lender from borrower default, their removal criteria are distinct.

PMI on conventional loans can often be cancelled, providing a clear path to reducing monthly housing costs. FHA MIP, however, has different rules, sometimes remaining for the entire loan term depending on the original down payment and loan origination date.

Automatic Termination of PMI

Federal law, specifically the Homeowners Protection Act (HPA) of 1998, outlines conditions for the automatic termination of PMI on conventional loans. This termination occurs when the loan balance is scheduled to reach 78% of the home’s original value, based on the initial amortization schedule. The original value is generally the lesser of the purchase price or the appraised value at the time of closing. Automatic termination also occurs when the loan reaches the midpoint of its amortization period, such as 15 years into a 30-year mortgage, provided the borrower is current on payments.

Requesting Early PMI Cancellation

Homeowners can often request PMI cancellation earlier than the automatic termination date for their conventional loan. This cancellation is typically possible when the loan balance reaches 80% of the home’s original value. Borrowers must generally have a good payment history, meaning no 30-day late payments in the last 12 months and no 60-day late payments in the last 24 months. The property must also be free of junior liens, such as a second mortgage or home equity line of credit, which could affect the lender’s security.

In some cases, especially if cancellation is based on increased home value due to market appreciation or improvements, the lender may require a new appraisal to confirm the current value. The homeowner typically covers the cost of this appraisal, which can range from $400 to $750.

Steps to Remove PMI

To remove PMI, contact your mortgage loan servicer. Homeowners should inquire about the specific policies and requirements for PMI cancellation on their loan. The servicer may require a formal written request for cancellation, potentially along with specific documentation. This documentation might include evidence of a good payment history or, if applicable, a recent appraisal to confirm the home’s value. After submitting the request, it is advisable to follow up with the servicer to ensure the cancellation process is moving forward and to confirm when the PMI will be removed from future payments.

Alternative Mortgage Insurance Solutions

Refinancing the mortgage can eliminate PMI if the new loan is originated with at least 20% equity in the home. However, refinancing involves new closing costs and a new interest rate, which necessitates a careful financial evaluation to ensure overall savings. Another option is Lender-Paid Mortgage Insurance (LPMI), where the lender pays the insurance premium in exchange for a slightly higher interest rate on the loan. While LPMI avoids a separate monthly PMI payment, it is generally not removable by the borrower because the cost is integrated into the loan’s interest rate, typically for the life of the loan unless refinanced.