When Can Private Mortgage Insurance Be Cancelled?

Private Mortgage Insurance (PMI) is an insurance policy required by lenders when a conventional loan is issued with a down payment less than 20% of the home’s purchase price. This insurance safeguards the lender against financial loss if a borrower defaults. While PMI protects the lender, its cost is typically passed on to the borrower, often as a monthly premium added to the mortgage payment. Understanding when and how this additional cost can be removed is a common concern for homeowners.

Automatic PMI Cancellation

The Homeowners Protection Act (HPA) established federal rules for the automatic termination of PMI for conventional loans. This law mandates that lenders automatically cancel PMI on homes once the loan-to-value (LTV) ratio reaches 78% of the original value of the home. The original value is typically defined as the lesser of the purchase price or the appraised value at the time the loan was originated. This automatic cancellation is based on the initial amortization schedule of the loan, which projects when the 78% LTV threshold will be met through regular mortgage payments.

For automatic termination, the borrower must be current on their mortgage payments. If the borrower is not current on the scheduled termination date, PMI will be cancelled on the first day of the month following the date they become current. This provision offers a clear path to ending PMI without direct borrower action, provided the loan remains in good standing.

Borrower-Requested PMI Cancellation

Homeowners can proactively request PMI cancellation before it automatically terminates. This borrower-initiated cancellation is possible once the loan-to-value (LTV) ratio reaches 80% of the home’s original value. The original value refers to the property’s value at the time of purchase or initial appraisal for the mortgage. To calculate this, the current outstanding loan balance is compared against that initial value.

Lenders require certain conditions for borrower-requested cancellation. A consistent payment history is needed, meaning no payments more than 30 days late in the past 12 months, and no payments more than 60 days late in the past 24 months. The property should not have any subordinate liens, such as a second mortgage or a home equity line of credit, which could affect the lender’s security interest. The borrower must submit a written request to their loan servicer.

Cancellation Through Home Value Appreciation

An increase in a home’s market value can provide another avenue for PMI cancellation, even if the borrower has not yet paid down the loan balance to the required 80% or 78% of the original value. This method relies on the current market value of the property, rather than its initial value. If the home’s value has appreciated significantly, the loan-to-value (LTV) ratio may drop below the cancellation threshold when calculated against the new, higher value.

To confirm the increased value, lenders require a new appraisal. The cost of this appraisal is the responsibility of the homeowner. Similar to borrower-requested cancellation, a good payment history and the absence of subordinate liens are prerequisites. This approach allows homeowners to potentially remove PMI sooner than scheduled if market conditions or home improvements have substantially boosted their equity.

Mortgage Insurance on FHA Loans

Mortgage insurance rules for Federal Housing Administration (FHA) loans differ significantly from those for conventional loans. FHA loans require a Mortgage Insurance Premium (MIP), not PMI, which functions differently in terms of cancellation. For most FHA loans originated on or after June 3, 2013, the MIP is required for the entire life of the loan. This means that even if the homeowner builds substantial equity, the MIP payments will continue for the full loan term.

There is a specific exception for FHA loans originated after this date: if the borrower made an original down payment of 10% or more, the MIP may be canceled after 11 years. For FHA borrowers seeking to eliminate MIP, refinancing into a conventional loan once sufficient equity is established is often the most viable option. This distinction highlights the unique nature of FHA mortgage insurance compared to conventional PMI.