When Can You Cancel Mortgage Insurance?

Mortgage insurance helps lenders manage the risk associated with loans where a borrower has less than a 20% down payment. Private Mortgage Insurance (PMI) for conventional loans protects the lender in the event of default and foreclosure. For homeowners, understanding when and how to cancel this insurance can lead to significant savings on monthly mortgage payments. This article explains the conditions and steps for removing mortgage insurance.

Conditions for Eliminating Mortgage Insurance

The ability to eliminate private mortgage insurance (PMI) on conventional loans is governed by the Homeowners Protection Act (HPA) of 1998, which established rules for cancellation and automatic termination. This federal law applies to most conventional mortgages on single-family primary residences closed on or after July 29, 1999. The HPA provides two pathways for removing PMI: automatic termination and borrower-initiated cancellation.

Automatic termination of PMI occurs when the loan-to-value (LTV) ratio reaches 78% of the property’s original value, based on the initial amortization schedule. The loan servicer must terminate PMI automatically on this date, provided the borrower is current on their mortgage payments. If the borrower is not current, the termination will happen once payments become current.

Borrowers can request cancellation of PMI once their LTV ratio reaches 80% of the original value. This request can be made based on the original amortization schedule or if additional payments have accelerated the principal balance reduction. To qualify for borrower-initiated cancellation, the homeowner needs a good payment history: no payments 30 or more days late in the past 12 months and no payments 60 or more days late in the past 24 months. Additionally, the servicer may require certification that no subordinate liens, such as a second mortgage, exist on the property. They might also require evidence, such as an appraisal, to confirm the property’s value has not declined below its original value.

Lender-Paid Mortgage Insurance (LPMI) differs from borrower-paid PMI. With LPMI, the lender pays the mortgage insurance premium, often in exchange for a slightly higher interest rate on the loan. Unlike borrower-paid PMI, LPMI cannot be canceled by the homeowner, as it is embedded in the loan’s interest rate. To remove LPMI, homeowners must refinance the mortgage into a new loan without LPMI or by selling the home.

Initiating the Cancellation Process

Once eligible for private mortgage insurance cancellation, homeowners should contact their mortgage loan servicer. This communication should be a formal written request to ensure a clear record.

The servicer will outline required documentation. This may include a formal written request form, proof of consistent on-time payments, and confirmation of the current loan balance. The servicer will review loan details to confirm eligibility based on the loan-to-value ratio and payment history.

If cancellation is based on increased home equity due to market appreciation or significant home improvements, the servicer may require a new appraisal of the property. This appraisal verifies the current market value and updates the loan-to-value ratio. The homeowner is typically responsible for the appraisal cost, which can range from approximately $300 to $500. After submitting documentation, homeowners can expect a review period, followed by notification from the servicer.

Specific Rules for Different Loan Types

While the Homeowners Protection Act (HPA) primarily governs Private Mortgage Insurance (PMI) on conventional loans, different rules apply to other mortgage types, most notably Federal Housing Administration (FHA) loans.

Federal Housing Administration (FHA) loans, by contrast, utilize Mortgage Insurance Premiums (MIP) instead of PMI, and their cancellation rules are significantly different. FHA loans require both an upfront mortgage insurance premium (UFMIP) and an annual MIP paid monthly. For many FHA loans originated on or after June 3, 2013, with an original LTV of 90% or greater, the annual MIP is generally permanent for the life of the loan. This means the MIP cannot be canceled unless the homeowner refinances the FHA loan into a conventional loan or sells the property.

For FHA loans originated after June 3, 2013, with an original LTV less than 90% (meaning a down payment of at least 10%), the annual MIP may be canceled after 11 years. FHA loans originated before June 3, 2013, generally have different MIP cancellation rules, often allowing for cancellation once a 78% LTV is reached, provided certain payment and seasoning requirements are met. The more stringent MIP rules for newer FHA loans often make refinancing into a conventional loan the most viable option for homeowners seeking to eliminate mortgage insurance.