When Can Mortgage Insurance Be Removed?

Mortgage insurance protects lenders from financial risk, especially when borrowers make smaller down payments or are at higher risk of default. This insurance helps individuals qualify for mortgages they might not otherwise obtain, facilitating homeownership. While it adds to the monthly payment, it can often be removed under specific conditions, reducing the overall cost of homeownership.

Understanding Removal Conditions for Conventional Loans

Private Mortgage Insurance (PMI) on conventional loans is governed by the federal Homeowners Protection Act (HPA) of 1998. This law established clear rules for PMI cancellation and automatic termination. The HPA generally applies to first mortgages on single-family primary residences where the sale closed on or after July 29, 1999.

There are two primary ways PMI can be terminated under the HPA: automatic termination and borrower-initiated cancellation. Automatic termination occurs when the loan’s principal balance is scheduled to reach 78% of the property’s original value, based on the initial amortization schedule. For this automatic removal to happen, the borrower must be current on their mortgage payments.

Borrowers can also proactively request PMI cancellation once their loan balance reaches 80% of the home’s original value. This request must be submitted in writing to the loan servicer. To qualify for borrower-initiated cancellation, the borrower must have a good payment history.

For a borrower-initiated cancellation, there should be no subordinate liens on the property. The lender may also require evidence that the property’s value has not declined below its original value. This often necessitates a new appraisal to confirm current market value, particularly if based on increased home equity.

The “original value” for LTV calculations refers to the lesser of the contract sales price or the appraised value of the home at the time of purchase. If the loan was a refinance, the original value is the appraised value at the time of refinancing. Loan-to-value (LTV) decreases as the principal balance is paid down or if the property’s market value increases.

The HPA primarily covers borrower-paid PMI on primary residences. It does not apply to all loan types. For these exceptions, the terms of PMI removal may differ and are not mandated by the HPA.

The Process for Removing Mortgage Insurance

Once a homeowner believes they meet the eligibility criteria for PMI removal, initiating the process involves direct communication with their loan servicer. The first step is to send a written request to the servicer, clearly stating the desire to cancel private mortgage insurance. While some servicers may accept verbal requests, a written record provides clear documentation.

The servicer will then review the loan account to verify eligibility. This review includes confirming a satisfactory payment history and checking for any subordinate liens on the property. If the request for cancellation is based on a current property valuation that has increased, the servicer will likely require a new appraisal. This appraisal helps establish the current loan-to-value ratio.

After receiving the request and any necessary documentation, the servicer will evaluate the information against the HPA guidelines and their internal policies. Servicers will respond within 30 days of receiving a complete request. They will confirm whether the conditions for removal have been met.

Upon approval, the servicer will cease collecting PMI premiums, and the monthly mortgage payment will decrease accordingly. If the request is denied, the servicer is required to provide a written explanation detailing the reasons. This allows the homeowner to understand what criteria were not met and what steps might be necessary to qualify later.

Mortgage Insurance for FHA Loans

Federal Housing Administration (FHA) loans have a different type of mortgage insurance called Mortgage Insurance Premium (MIP). MIP is a mandatory requirement for all FHA loans, regardless of the borrower’s down payment amount.

FHA MIP consists of two components: an Upfront Mortgage Insurance Premium (UFMIP) and an annual MIP. The UFMIP is a one-time fee. The annual MIP is a recurring fee, calculated as a percentage of the loan amount and paid in monthly installments as part of the mortgage payment.

The conditions for removing FHA MIP depend significantly on when the loan was originated and the initial down payment. For FHA loans originated before June 3, 2013, MIP may be removed once the loan-to-value (LTV) ratio reaches 78%, provided the borrower has a good payment history and has paid the premium for a minimum number of years. This 78% LTV is based on the original loan amount and appraisal.

For FHA loans originated on or after June 3, 2013, the rules for MIP removal are more stringent. If the borrower made a down payment of less than 10% at the time of origination, the annual MIP is required for the entire life of the loan. However, if the down payment was 10% or more, the MIP can be removed after 11 years, assuming a good payment history has been maintained.

Given these conditions, refinancing the FHA loan into a conventional loan is often the most common strategy to eliminate FHA MIP, particularly for loans where it would otherwise be permanent. This approach allows borrowers to terminate the MIP once they achieve sufficient equity to qualify for a conventional loan without PMI. Refinancing can also provide an opportunity to secure a lower interest rate or different loan terms.