When Can You Drop Mortgage Insurance?

Mortgage insurance serves as a safeguard for lenders, allowing them to offer loans to individuals who might not otherwise qualify. It protects the lender against financial losses if a borrower cannot make payments. While it adds to monthly housing costs, it facilitates homeownership for those with smaller down payments. Understanding how to remove this insurance can lead to significant savings.

Understanding Mortgage Insurance and Its Varieties

Mortgage insurance primarily reduces the lender’s risk, not the borrower’s. Lenders typically require it when a borrower makes a down payment of less than 20% on a home. This requirement helps mitigate the increased risk associated with loans that have a higher loan-to-value (LTV) ratio. The two main types are Private Mortgage Insurance (PMI) for conventional loans and Mortgage Insurance Premiums (MIP) for Federal Housing Administration (FHA) loans. The rules for removing PMI and MIP differ significantly.

Requirements for Removing Private Mortgage Insurance (PMI)

The Homeowners Protection Act (HPA) of 1998 governs PMI removal from conventional loans. Borrowers can initiate PMI cancellation once their loan’s principal balance reaches 80% of the home’s original value. This “original value” is the lesser of the contract sales price or the appraised value at the time of purchase or refinance. A written request to the loan servicer is required.

Borrower-initiated cancellation also requires a good payment history, typically meaning no payments 30 days or more past due in the last 12 months, and no payments 60 days or more past due in the previous 24 months. Additionally, the loan must not have any junior liens, such as a second mortgage or home equity line of credit. If the LTV is based on the current market value due to appreciation or improvements, the servicer may require a new appraisal at the borrower’s expense to confirm the property’s value and equity threshold.

The HPA also mandates automatic PMI termination, even without a borrower request. This occurs when the principal balance is scheduled to reach 78% of the home’s original value, provided the borrower is current on payments. Furthermore, PMI must be terminated by the midpoint of the loan’s amortization schedule if the borrower is current on payments, regardless of the 78% LTV threshold.

Requirements for Removing FHA Mortgage Insurance Premiums (MIP)

Mortgage Insurance Premiums (MIP) for FHA loans have different rules than PMI, with removal depending on the loan’s origination date. For FHA loans originated before June 3, 2013, annual MIP could be removed once the principal balance reached 78% of the original value, provided the loan was at least five years old. This automatic cancellation applied to both 30-year and 15-year FHA loans.

For FHA loans originated on or after June 3, 2013, MIP removal rules are more stringent. In most cases, MIP is required for the entire life of the loan. The only exception is if the borrower made an initial down payment of 10% or more, allowing MIP cancellation after 11 years. If the down payment was less than 10%, MIP persists for the full mortgage term. Many borrowers with these FHA loans refinance into a conventional loan to eliminate MIP, provided they have sufficient equity.

The Process for Requesting Removal

Once eligibility criteria are met, the next step is to formally request cancellation. Contact your loan servicer, the company that handles your mortgage payments, rather than the original lender. Having your loan number readily available will assist the servicer in guiding you through the specific requirements and documentation needed for your particular loan.

A formal written request is typically required to initiate the cancellation process. The servicer may also request documentation to verify the property’s value, especially if the request is based on increased home equity from appreciation or improvements. This often involves ordering a new appraisal, usually at the borrower’s expense. Some servicers may accept a broker price opinion (BPO) as a less expensive alternative to a full appraisal.

After submitting all necessary documentation and any required appraisal, the loan servicer will review the request. This review process can take several weeks to a month. If approved, the servicer will notify the borrower, and mortgage insurance premiums will cease, resulting in a lower monthly payment. If denied, the servicer should provide the reasons, allowing the borrower to address any deficiencies or wait for automatic termination if applicable.