When Can Private Mortgage Insurance Be Removed?

Private Mortgage Insurance (PMI) protects lenders if a borrower defaults on a conventional mortgage. It is typically required when a homebuyer makes a down payment of less than 20% of the home’s purchase price. While PMI adds to monthly expenses, understanding its removal can lead to significant savings.

Understanding Private Mortgage Insurance

Private Mortgage Insurance (PMI) safeguards lenders against losses if a borrower defaults and the property goes into foreclosure. It is typically required for conventional loans when the down payment is less than 20% of the home’s purchase price or appraised value, resulting in a loan-to-value (LTV) ratio exceeding 80%. PMI reduces lender risk, allowing individuals to purchase a home with a lower upfront investment. Borrowers usually pay for PMI as a recurring charge, often included in their monthly mortgage payment. The cost varies based on the loan amount, credit score, and LTV ratio.

Automatic PMI Termination

The Homeowners Protection Act (HPA) of 1998 mandates automatic PMI termination under specific conditions. Lenders must automatically cancel PMI when the loan’s principal balance is scheduled to reach 78% of the home’s original value. This “original value” is the lesser of the property’s sales price or its appraised value at loan origination. For automatic termination, the borrower must be current on payments.

PMI also terminates automatically when the loan reaches the midpoint of its amortization schedule, provided payments are current. For example, a 30-year mortgage reaches its midpoint after 15 years. This occurs even if the 78% LTV threshold has not been met. The lender notifies the borrower when PMI terminates.

Borrower-Requested PMI Cancellation

Homeowners can request PMI cancellation before automatic termination under HPA conditions. A borrower can request cancellation when the loan’s principal balance reaches 80% of the home’s original value. A good payment history is required: no mortgage payments 30 days or more past due in the past 12 months, and no payments 60 days or more past due in the past 24 months.

The homeowner must submit a written request to their loan servicer. The lender may require certification of no junior liens, such as a second mortgage or home equity line of credit. Additionally, the lender may request a new appraisal at the borrower’s expense (typically $300 to $500) to confirm the property’s value has not declined below its original value. Increased property value due to market appreciation or home improvements can help reach the 80% LTV threshold sooner.

PMI for Government-Backed Loans and Other Scenarios

Mortgage insurance requirements differ for government-backed loans compared to conventional loans.

FHA Loans (MIP)

Federal Housing Administration (FHA) loans include Mortgage Insurance Premium (MIP), with distinct rules from conventional PMI. For most FHA loans with case numbers assigned on or after June 3, 2013, if the initial down payment was less than 10%, annual MIP is required for the loan’s entire life. If the original down payment was 10% or more, MIP may be canceled after 11 years. The primary way to remove MIP from an FHA loan is by refinancing into a conventional mortgage once sufficient equity is established.

VA Loans

Veterans Affairs (VA) loans generally do not require monthly mortgage insurance. Instead, VA loans include a one-time VA Funding Fee, which helps offset program costs. This fee, ranging from 0.5% to 3.3% of the loan amount, varies based on the borrower’s down payment, loan type, and whether it’s their first time using VA loan benefits. The funding fee can be paid upfront at closing or rolled into the loan amount. Certain veterans, such as those receiving service-connected disability compensation, may be exempt from paying the funding fee.

Lender-Paid Mortgage Insurance (LPMI)

Lender-Paid Mortgage Insurance (LPMI) is another scenario, where the lender pays the mortgage insurance directly to the insurer. In exchange, the borrower accepts a slightly higher interest rate. Since LPMI is integrated into the interest rate, it cannot be removed directly by the borrower. To eliminate LPMI, a homeowner must refinance their mortgage into a new loan without this feature.