When Can You Cancel Private Mortgage Insurance (PMI)?

Private Mortgage Insurance (PMI) is common for many individuals who purchase a home with a conventional loan and a down payment of less than 20% of the home’s value. This insurance primarily protects the mortgage lender, not the homeowner, against potential losses if the borrower defaults on the loan. While PMI makes homeownership accessible by reducing the initial financial burden, it adds an extra cost to the monthly mortgage payment. Many homeowners seek to cancel PMI to reduce their monthly expenses as they build equity.

Automatic PMI Termination

Federal law, specifically the Homeowners Protection Act (HPA) of 1998, mandates the automatic termination of Private Mortgage Insurance under certain conditions. This act applies to conventional, privately insured first mortgages on single-family primary residences closed on or after July 29, 1999. Lenders are legally required to automatically cancel PMI when the loan’s principal balance is scheduled to reach 78% of the home’s original value. The “original value” is typically defined as the lesser of the contract sales price or the appraised value at the time the loan was originated.

This automatic cancellation is based on the initial amortization schedule, meaning it occurs as planned, assuming regular payments. For this termination to take effect, the homeowner must be current on their mortgage payments at the time the 78% loan-to-value (LTV) ratio is reached. If the borrower is not current, PMI termination will occur on the first day of the first month after they become current on payments. The HPA also stipulates a final termination point: PMI must be canceled by the midpoint of the loan’s amortization period, even if the 78% LTV has not been met, provided the borrower is current on payments.

Borrower-Initiated PMI Cancellation

Homeowners can proactively request the cancellation of Private Mortgage Insurance before it is automatically terminated. This typically becomes an option when the loan balance reaches 80% of the home’s original value. The “original value” is the lesser of the sales price or the appraised value at loan origination. This approach allows homeowners to potentially remove PMI sooner, especially if they have made additional principal payments or if the property’s value has increased significantly.

To qualify for borrower-initiated cancellation, several conditions usually must be met. The homeowner needs a good payment history. The mortgage must also be current, and there should be no junior liens, such as a second mortgage or home equity line of credit (HELOC), on the property. In some cases, particularly if the cancellation is sought due to increased property value, the lender may require a new appraisal to confirm the current home value.

Steps to Cancel PMI

Initiating the PMI cancellation process involves a few straightforward actions once you believe you meet the eligibility criteria. The first step is to contact your mortgage servicer. You should inquire about their specific requirements and procedures for PMI cancellation, as servicers may have their own guidelines in addition to federal regulations. It is often advisable to submit your request in writing to create a clear record.

If your cancellation request is based on an increase in your home’s value due to market appreciation or significant improvements, the servicer will likely require a new appraisal. The homeowner typically bears the cost of this appraisal. You will also need to provide any requested documentation, such as certification that there are no junior liens on the property. After receiving your request and any necessary documentation, the servicer will review your eligibility and should notify you of their decision. If approved, PMI payments will cease, and any unearned premiums collected beyond the cancellation date should be refunded.

Special Considerations for PMI Cancellation

Certain types of loans or specific circumstances can affect PMI cancellation rules, introducing nuances to the standard process. For example, Federal Housing Administration (FHA) loans have Mortgage Insurance Premiums (MIP) instead of PMI, and their cancellation rules differ significantly. MIP is often required for the life of the loan unless specific conditions are met, such as a large down payment. To remove MIP on these loans, homeowners often need to refinance into a conventional loan.

Additionally, some “high-risk” or “jumbo” loans may have different or stricter cancellation policies. A loan modification can also impact the original loan-to-value (LTV) calculations and may require recalculating the cancellation or termination dates for PMI. Finally, the presence of junior liens can prevent PMI cancellation even if the LTV ratio on the first mortgage meets the requirements, as these additional loans increase the overall risk to the primary lender.